For the fiscal year ended December 31,
As filed with the Securities and Exchange Commission on March 8, 2005February 29, 2008
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
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| OR | |
| For the fiscal year ended December 31, |
| OR | |
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| OR | |
| SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 1-15170
GlaxoSmithKline plc
(Exact name of Registrant as specified in its charter)
England
980 Great West Road, Brentford, Middlesex TW8 9GS England
(Address of principal executive offices)
Simon Bicknell
Company Secretary
GlaxoSmithKline plc
980 Great West Road
Brentford
England
011 44 20 8047 5000
company.secretary@gsk.com
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
| Title of Each Class | Name of Each Exchange On Which Registered |
| American Depositary Shares, each representing 2 | New York Stock Exchange |
| Ordinary Shares, Par value 25 pence |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
| Ordinary Shares of 25p each | 5,508,392,868 | |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
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Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the Registrantregistrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrantregistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Securities Exchange Act of 1934. (Check one):
Large accelerated filer Accelerated filer Non-accelerated filer
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
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If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the Registrantregistrant has elected to follow.
Item 17 Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes No
 | ||
 |
| Question | How are you adapting your business model to |
| one | succeed in the current healthcare environment? |
| Answer page 4 | |
| Question | Why do you have a Consumer Healthcare |
| two | business?Answer page 5 |
| Question | Share prices in the sector haven’t performed well, |
| three | what is the outlook for GSK?Answer page 6 |
| Question | How is your research and development pipeline |
| four | performing?Answer page 7 |
| Question | What are you doing to improve healthcare in the |
| five | developing world?Answer page 8 |
GlaxoSmithKline plc is an English public limited company. It shares are listed on the London Stock Exchange and the New York Stock Exchange.
History and development of the companyGlaxoSmithKline plc, and its subsidiary and associated undertakings, constitute a major global healthcare group engaged in the creation, discovery, development, manufacture and marketing of pharmaceutical and consumer health-related products.
GlaxoSmithKline has its corporate head office in London. It also has operational headquarters in Philadelphia and Research Triangle Park, USA, and operations in some 116 countries, with products sold in over 125 countries. The principal research and development (R&D) facilities are in the UK, the USA, Japan, Italy, Spain and Belgium. Products are currently manufactured in some 38 countries.
The major markets for the Group’s products are the USA, France, Japan, the UK, Italy, Germany and Spain.
GlaxoSmithKline plc is a public limited company incorporated on 6th December 1999 under English law. On 27th December 2000 the company acquired Glaxo Wellcome plc and SmithKline Beecham plc, both English public limited companies, by way of a scheme of arrangement for the merger of the two companies. Both Glaxo Wellcome and SmithKline Beecham were major global healthcare businesses.
Business segmentsWebsiteGlaxoSmithKline operates principally in two industry segments:
Annual Report and ReviewThis report is the Annual Report of GlaxoSmithKline plc for the year ended 31st December 2004, prepared in accordance with United Kingdom requirements.
A summary report on the year, the Annual Review 2004, intended for the investor not needing the full detail of the Annual Report, is produced as a separate document. The Annual Review includes the joint statement by the Chairman and the Chief Executive Officer, a summary review of operations, summary financial statements and a summary remuneration report.
The Annual Review is issued to all shareholders. The Annual Report is issued to shareholders who have elected to receive it. Both documents are available on GlaxoSmithKline’s corporate website at www.gsk.com.
Website
GlaxoSmithKline’s website www.gsk.com gives additional information on the Group. Information made available on the website does not constitute part of this Annual Report.
BackNotice regarding limitations on Director liability under English Law
Under the UK Companies Act 2006, a safe harbour limits the liability of Directors in respect of statements in and omissions from the Report of the Directors contained on pages 9 to Contents
Financial summary
| 2003 | Growth | |||||||
| 2004 | (restated) | |||||||
| Statutory results | £m | £m | CER% | £% | ||||
| Turnover | 20,359 | 21,441 | 1 | (5 | ) | |||
| Trading profit | 6,150 | 6,509 | 5 | (6 | ) | |||
| Profit before taxation | 6,119 | 6,313 | 8 | (3 | ) | |||
| Earnings/Net income | 4,302 | 4,478 | 7 | (4 | ) | |||
| Basic earnings per share | 75.0 | p | 77.1 | p | 8 | (3 | ) | |
| Dividends per share | 42.0 | p | 41.0 | p | ||||
| Merger, restructuring and disposal of subsidiaries | ||||||||
| Trading profit | – | (395 | ) | |||||
| Profit before taxation | – | (390 | ) | |||||
| Earnings/Net income | – | (281 | ) | |||||
| Earnings per share | – | (4.9 | )p | |||||
| Business performance | ||||||||
| Turnover | 20,359 | 21,441 | 1 | (5 | ) | |||
| Trading profit | 6,150 | 6,904 | (1 | ) | (11 | ) | ||
| Profit before taxation | 6,119 | 6,703 | 2 | (9 | ) | |||
| Adjusted earnings/Net income | 4,302 | 4,759 | 1 | (10 | ) | |||
| Adjusted earnings per share | 75.0 | p | 82.0 | p | 2 | (9 | ) | |
The Group,86, under English law the Directors would be liable to the company (but not to any third party) if the Report of the Directors contains errors as a multinational business, operates in many countries and earns revenues and incurs costs in many currencies. The resultsresult of recklessness or knowing misstatement or dishonest concealment of a material fact, but would not otherwise be liable.
Report of the Group, as reportedDirectors
Pages 9 to 86 inclusive consist of a Report of the Directors that has been drawn up and presented in sterling, are therefore affected by movementsaccordance with and in exchange rates between sterling and overseas currencies. Average exchange rates prevailing during the period are used to translate the results and cash flows of overseas subsidiary and associated undertakings and joint ventures into sterling. Period end rates are used to translate the net assets of those undertakings. The currencies which most influence these translations are the US dollar, the Euroreliance upon English company law and the Japanese Yen.
In order to illustrate underlying performance, it is the Group’s practice to discuss its results in terms of constant exchange rate (CER) growth. This represents growth calculated as if the exchange rates used to determine the results of overseas companies in sterling had remained unchanged from those used in the previous year. CER% represents growth at constant exchange rates. £% represents growth at actual exchange rates.
During the years 2000 to 2003, business performance was the primary performance measure used by management and was presented after excluding merger items, integration and restructuring costs and disposals of businesses. Management believes that exclusion of these items provides a better comparisonliabilities of the wayDirectors in whichconnection with that report shall be subject to the business was managedlimitations and gives an indication of the performance of the Group in terms of those elements of revenue and expenditure which local management was able to influence.restrictions provided by such law.
For 2004, with the completion of these programmes, the Group is reporting results on a statutory basis only. Growth rates are presented comparing 2004 results both with 2003 business performance results and 2003 statutory results. Management considers that the comparison of 2004 statutory results with 2003 business performance results gives the most appropriate indication of the Group’s performance for the period under review and therefore commentaries are presented on this basis unless otherwise stated.
Cautionary statement regarding forward-looking statements
The Group'sGroup’s reports filed with or furnished to the US Securities and Exchange Commission (SEC), including this document and written information released, or oral statements made, to the public in the future by or on behalf of the Group, may contain forward-looking statements. Forward-looking statements give the Group'sGroup’s current expectations or forecasts of future events. An investor can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as ‘anticipate’, ‘estimate’, ‘expect’, ‘intend’, ‘will’, ‘project’, ‘plan’, ‘believe’ and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results. The Group undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.
Forward-looking statements involve inherent risks and uncertainties. The Group cautions investors that a number of important factors, including those in this document, could cause actual results to differ materially from those contained in any forward-looking statement. Such factors include, but are not limited to, those discussed under ‘Risk factors’ on pages 7650 to 7853 of this Annual Report.
Contents
| Mission | ||
| Our global quest is to improve the quality of human life by enabling people to do more, feel better and live longer. | ||
| Our Spirit | ||
| We undertake our quest with the enthusiasm of entrepreneurs, excited by the constant search for innovation. We value performance achieved with integrity. We will attain success as a world class global leader with each and every one of our people contributing with passion and an unmatched sense of urgency. | ||
| REPORT OF THE DIRECTORS |
| Chairman and CEO summary | 3 | |
| Five questions, five answers | 4 | |
| Report of the Directors | ||
| Business review | 9 | |
| Corporate governance | 59 | |
| Remuneration Report | 71 | |
| FINANCIAL STATEMENTS |
| INVESTOR INFORMATION |
| Investor information | ||
| Financial record | ||
| Shareholder information | ||
| Taxation information for shareholders | ||
| Glossary of terms | ||
| GSK Annual Report 2007 | 1 |
JointAnnual Report and Annual Review
This report is the Annual Report of GlaxoSmithKline plc for the year ended 31st December 2007, prepared in accordance with United Kingdom requirements. It was approved by the Board of Directors on 27th February 2008 and published on 28th February 2008.
A summary report on the year, the Annual Review 2007, which is prepared in accordance with United Kingdom requirements and intended for the investor not needing the full detail of the Annual Report, is produced as a separate document. It includes the joint statement by the Chairman and the Chief Executive Officer, a summary review of operations, summary financial statements and a summary remuneration report. The Annual Review is issued to all shareholders. The Annual Report is issued to shareholders who have elected to receive it. Both documents are available on GSK’s website.
In this Report ‘GlaxoSmithKline’, the ‘Group’ or ‘GSK’ means GlaxoSmithKline plc and its subsidiary undertakings; the ‘company’ means GlaxoSmithKline plc; ‘GlaxoSmithKline share’ means an Ordinary share of GlaxoSmithKline plc of 25p; an American Depositary Share (ADS) represents two GlaxoSmithKline shares.
Business performance
Business performance, which is a supplemental non-IFRS measure, is the primary performance measure used by management and is presented after excluding costs relating to the new Operational Excellence programme, which commenced in October 2007. Management believes that exclusion of these items provides a better reflection of the way in which the business is managed and gives a more useful indication of the underlying performance of the Group. This information, which is provided in addition to the total results prepared under IFRS, is given to assist shareholders to gain a clearer understanding of the underlying performance of the business and to increase comparability for the periods presented.
Exchange rates
The Group operates in many countries and earns revenues and incurs costs in many currencies. The results of the Group, as reported in Sterling, are affected by movements in exchange rates between Sterling and other currencies. Average exchange rates prevailing during the period are used to translate the results and cash flows of overseas subsidiaries, associates and joint ventures into Sterling. Period end rates are used to translate the net assets of those entities. The currencies which most influence these translations are the US dollar, the Euro and the Japanese Yen.
In order to illustrate underlying performance, it is the Group’s practice to discuss its results in terms of constant exchange rate (CER) growth. This represents growth calculated as if the exchange rates used to determine the results of overseas companies in Sterling had remained unchanged from those used in the previous year. CER% represents growth at constant exchange rates. £% represents growth at actual exchange rates.
All commentaries in this Report are presented in terms of CER unless otherwise stated.
We knew 2004 would beHistory and development of the company
GlaxoSmithKline plc is a challenging yearpublic limited company incorporated on 6th December 1999 under English law. Its shares are listed on the London Stock Exchange and the New York Stock Exchange. On 27th December 2000 the company acquired Glaxo Wellcome plc and SmithKline Beecham plc, both English public limited companies, by way of a scheme of arrangement for the merger of the two companies. Both Glaxo Wellcome and SmithKline Beecham were major global healthcare businesses.
GSK plc and its subsidiary and associated undertakings constitute a major global healthcare group engaged in the creation, discovery, development, manufacture and marketing of pharmaceutical and consumer health-related products.
GSK has its corporate head office in London. It also has operational headquarters in Philadelphia and Research Triangle Park, USA, and operations in some 114 countries, with products sold in over 140 countries. The principal research and development (R&D) facilities are in the UK, the USA, Belgium, Italy, Japan and Spain. Products are currently manufactured in some 38 countries.
The major markets for the Group’s products are the USA, France, Japan, the UK, Italy, Germany and Spain.
Business segments
GSK operates principally in two industry segments:
| • | Pharmaceuticals (prescription pharmaceuticals and vaccines) |
| • | Consumer Healthcare (over-the-counter medicines, oral care andnutritional healthcare). |
Brand names appearing in italics throughout this report are trademarks either owned by and/or licensed to GlaxoSmithKline or associated companies, with the exception ofBaycol andLevitra, trademarks of Bayer,Boniva/Bonviva, a trademark of Roche,Citrucel, a trademark of Merrell Pharmaceuticals,Entereg, a trademark of Adolor Corporation in the USA,Hepsera, a trademark of Gilead Sciences in some countries including the USA,HuMax-CD20 a trademark of Genmab,Integrilin, a trademark of Millennium Pharmaceuticals,Lymphostat B, a trademark of Human Genome Sciences,Nicoderm, a trademark of Sanofi-Aventis, Pfizer Canada, Elan, Novartis, Merrell or GlaxoSmithKline, andVesicare, a trademark of Astellas Pharmaceuticals in many countries and of Yamanouchi Pharmaceuticals in certain countries, all of which are used in certain countries under licence by the Group.
| 2 | GSK Annual Report 2007 |
| Review of 2007 |
| Chairman and CEO summary |
It is natural that our stakeholders want to know how we are pleasedfacing the challenges of the fast-changing healthcare environment, and how we plan to report that we have achievedconvert our financial and business objectives.strategic direction into profitable results, which should return value to our shareholders.
In our lastOur 2007 Annual Report we predictedaims to answer these questions and demonstrate that 2004 would be a challenging year as we feltour strategic focus on research and development, which is delivering improved pipeline productivity, will enhance returns to shareholders over the full impactlong-term. The success of generic competition to Paxil our Consumer Healthcare business and the introductionstrong performance of generic Wellbutrin.
GlaxoSmithKline managed this year well, thanksmany key pharmaceutical and vaccine products in our current portfolio are also providing strong contributions to the underlying strength of the business. In fact, GlaxoSmithKline is a much stronger company today than it was a year ago.
Our broad-based portfolio of fast-growing productsgrowth and continued focus on controlling costs enabledhelped us to absorb the lossdeliver 2007 business performance earnings per share (EPS) growth of more than £1.5 billion of business to generics and still achieve a one per cent increase in global pharmaceutical sales. Turnover of £20 billion grew one per cent10% at constant exchange rates (CER); results that were at the high end of our guidance.
We also continue to balance the needs of our shareholders with our commitment to improve healthcare in communities across the world –we feel this is not just the right thing to do; but the only thing to do.
Financial performance and outlook
Total sales were £22.7 billion, up 2%, and we achieved our guidance of earnings per share (EPS) at least in line with business performance EPS was 99.1p, up 10% from 2006. The Board declared a dividend for the year of 53p, up from 48p in 2003 (at CER). Our EPS grew two per cent to 75 pence in 2004.2006.
In 2005, we expect to see faster growth with an EPS percentage CER growthPharmaceutical turnover was level at £19.2 billion, impacted by generic competition in the low double-digit range on an International Financial Reporting Standards (IFRS) basis*. This is being driven by the strong growthUSA and a decrease of 22% inAvandiasales globally. Among other key products, sales ofSeretide/Advair for asthma and continuing efficiencies in our operations. Our most exciting phase ofCOPD rose by 10% to £3.5 billion while those forLamictal, for epilepsy and bipolar disorder, increased by 18% to £1.1 billion. The Vaccines business grew by 20% to £2 billion. Consumer Healthcare generated strong sales growth, will come whenup 14% to almost £3.5 billion.
2007 also saw the new compounds and vaccines currently in development start contributing to our performance over the next few years.
GlaxoSmithKline has onelaunch of the largest and most promising pipelinesshare buy-back in the industry,industry; share repurchases of £2.5 billion were made in 2007 under this programme and a further £6 billion are expected in 2008. We expect to repurchase £12 billion of shares under this programme by mid-2009.
In May 2007, an article in the New England Journal of Medicine suggested that there may be cardiovascular risk associated with 140 projectsAvandia, our second largest product. This was followed by intense media coverage and despite our efforts to explain the entirety of the data, which did not confirm this risk, sales ofAvandia dropped significantly in the second half of 2007.
The decline inAvandia sales, together with increased generic competition in the USA, will adversely impact our earnings in 2008 and we expect a mid-single digit percentage decline in business performance EPS, at CER. Looking ahead we remain confident in GSK’s future. Our fast-growing vaccines business, the resurgence of our Consumer Healthcare division and the strong performance of key pharmaceutical products are all providing contributions to growth. The momentum of our late-stage pipeline continues to enhance our business and is producing a significant renewal of our product line.
Seeing results from our investment in R&D
Last year, GSK received a record 10 product approvals and filed 10 product applications. New products launched during 2007 wereTykerb, for breast cancer,Veramyst/Avamys, for allergic rhinitis,Altabax/Altargo for the treatment of skin infections andCervarix our vaccine for the prevention of cervical cancer.
We currently have 13 new product opportunities filed with regulators and commenced nine new phase III clinical development (asprogrammes in 2007. There are at present 34 key assets in the phase III or registration stages.
Leading the way
Although the future remains challenging, GSK is determined to remain an industry leader across many fronts; not only through our pipeline progress but also through efficiency initiatives and by fulfilling our responsibilities to communities worldwide.
In October we announced a significant new £1.5 billion Operational Excellence programme to improve operational efficiency and productivity. We expect this to deliver annual pre-tax savings of £700 million by 2010.
During 2007, our global community investment contributions continued to deliver a positive influence on the lives of people worldwide and we are proud to play our part to the full.
We are grateful to our dedicated people for their efforts and passion which contributed so much to our success. We also extend the company’s thanks to you, our shareholders, for your continuing support.
There have been changes in the management team in the past 12 months including the departure of David Stout, President of Pharmaceutical Operations, and Rupert Bondy, Senior Vice President and General Counsel who will be leaving GSK at the end of February 2005), including 88 New Chemical Entities (NCEs), 32 Product Line ExtensionsMarch 2008. We thank them both for their contribution to GSK over many years. We also welcomed Professor Sir Roy Anderson to the Board as a Non-Executive Director and 20 vaccines. Of these compounds, 43 NCEs have moved into Phase II trials, including compounds to treat HIV, diabetes, blood disordersAndrew Witty and multiple sclerosis,Chris Viehbacher as Executive Directors.
Overall, we are confident in GSK’s strength as an organisation and data on at least 15 of these are expected during 2005. In 2005,that we also anticipate the launch of six new products, including Rotarix for rotavirus, Vesicare for overactive bladder, Boniva for osteoporosis, Avandaryl for diabetes, Requip for restless legs syndrome and Entereg for post-operative bowel disorders.
Our pipeline is focused on developing new medicines and vaccines to treat diseases of unmet medical need, such as cancer and Alzheimer’s disease. Many of these have the potentialexpertise to be important new products.deal with the changing environment we face.
For example, we believe that Cervarix, our promising vaccine candidate against cervical cancer, has the potential to make a major contribution to healthcare globally and to become our best-selling vaccine. We expect to file Cervarix in the European Union and international markets in 2006.
Great opportunities lie ahead of us. This year, we will work to ensure a greater understanding by key stakeholders of the value of innovative medicines. We will continue our contribution to finding a solution to the healthcare funding crisis, and we will seek new ways of improving access to our medicinesThank you again for the people who need them most but are least able to pay for them. Our Corporate Responsibility Principles continue to guide the way we do business. A separate 2004 Corporate Responsibility Report (available from the GlaxoSmithKline website) explains progress against these Principles during the year.
AcknowledgementsWe acknowledge with gratitude the contribution of Sir Christopher Hogg and Sir Peter Job, who retired from the Board at the end of 2004. Sir Christopher chaired GlaxoSmithKline through a period that saw the company derive the full benefits of the merger and meet the challenges caused by the loss of patent protection on major products.
John Coombe, Chief Financial Officer, will retire from the Board of GlaxoSmithKline on 31st March 2005. John has served GlaxoSmithKline and its predecessor companies in an exemplary manner for more than 18 years, playing a major role in guiding the company through the post-merger period and establishing GlaxoSmithKline as a leader within the global pharmaceutical industry.
We thank all three departing directors for their substantial contributions to GlaxoSmithKline and wish them well for the future.your support.
  |   | |
| Sir Christopher Gent |
| |
| Chief Executive Officer |
Message from Sir Christopher Gent, Chairman
The AGM sees the retirement of our Chief Executive Officer JP Garnier, who has served GSK with great style and distinction since the merger in December 2000. JP brought wit, wisdom and hugely impressive business acumen to his role. He was directly responsible for many of the innovations of the last seven years, including the introduction of our Centres of Excellence in Drug Discovery, which have transformed the way we approach R&D, and driving a renewed focus and energy behind our vaccines business.
Thank you, JP, on behalf of the Board and the stakeholders of GSK.
Andrew Witty becomes our new Chief Executive Officer at the AGM. Having worked for us since 1985, Andrew is experienced, enthusiastic and well-respected both inside GSK and beyond. I have no doubt that he will ensure that GSK fulfils its rich potential, and I look forward to working alongside him.
 | 3 | |
 |
04GlaxoSmithKlineWe consult our stakeholders in many ways. From shareholders, patients, governments,non-government organisations, payers and employees we hear many different questions. For this year’s Annual Report we have focused on five key questions that lie at the heart of the business.
BackHow are you adapting your
business model to Contentssucceed
in the current healthcare
environment?
Diversity and balance
We operate in a fast-changing market from both a regulatory and payer perspective. Regulators are becoming increasingly risk conscious and payers more cost conscious. It is imperative that pharmaceutical companies, including GSK, modernise and evolve to reflect these market changes.
As we move forward into this changing environment, we are well-positioned, relative to our peers. Why? Because we are a broad-based, geographically-diverse and well-balanced Group encompassing Pharmaceuticals, vaccines and Consumer Healthcare.
Through the intellectual property system, we have a relatively short patent exclusivity for traditional small molecule chemical pharmaceuticals. However, Biological Medicines, vaccines and Consumer Healthcare products generally have a significantly longer product life cycle. Our presence in all these sectors will continue to grow and enables us to better balance risk and sustain growth.
GlaxoSmithKline 05Growing the pipeline
In recent years, our pipeline has expanded and flowed more quickly than ever before. Seven years ago we had relatively few products in our late-stage pipeline. Today we have 157 projects in clinical development, of which 118 are NCEs or new vaccines; this includes 34 key assets in late stage development.
This is a significant transformation, driven largely by changes we have made to both our research and development (R&D) ‘hardware’ and ‘software’. We have radically changed the R&D infrastructure, breaking down the traditional big bureaucratic pharma model into R&D Centres of Excellence for Drug Discovery (CEDDs). At the same time, we are evolving and adapting our culture, helping our talented people to improve the quality of our science and management.
We will continue to ensure that we are creating new medicines targeted at unmet medical need, and we will focus on developing these medicines in a way that allows regulators to make a clear assessment about the relative risks and benefits.
| Summary | ||
| Our markets are changing and we are evolving rapidly to reflect the new environment. We are well-positioned, relative to our peers. | ||
| A broad-based, geographically-diverse and | ||
| Improved pipeline productivity. | ||
| Innovative programmes to reduce expenditureand work more closely with customers. | ||
BackReducing expenditure
Cost remains a major issue for our customers because the demand for healthcare continues to Contentsincrease, driven by ageing populations and rising expectations. We are committed to working with governments to reduce total healthcare costs and to lowering our own expenditure so that we operate more efficiently and profitably in a lower priced environment – enabling us to continue our investment in R&D.
06GlaxoSmithKline Description of business
Strategy
GlaxoSmithKline’s business goal isAt the same time, we are adopting a more flexible and creative approach to become the indisputable leader in the pharmaceutical and consumer healthcare industry. Achieving this goal will require meeting the three key challenges that face both the industry and societyproduct pricing. We are alert to opportunities to share risk with customers as a whole:means of demonstrating that we have great belief in our medicines – and that we only expect to be rewarded when our medicines deliver the anticipated benefits.
GlaxoSmithKline has developed strategiesOur Operational Excellence programmes, which focus on a numberare an important part of keyour strategy, mean we are improving efficiency year-on-year. We are also working hard to lower the cost of developing products and have already outsourced some areas of our business drivers in order to meet these challenges.lower-cost countries. We will continue to assess and capture other opportunities to reduce costs.
Build the best product pipelineSeizing global opportunities
Globalisation is an increasingly important factor in the industryThe Group is aiming to createbusiness landscape. In the best product pipeline inpast, we have derived most of our growth from the industry for the benefit of patients, consumers and society. This includes developing a focused portfolio strategy to support the pipeline and manage the full life cycle of compounds from launch as a prescription medicine through to becoming over-the-counter products where appropriate. This strategy includes selective in-licensing and efficient execution of development, commercialisation and the supply chain processes.
GlaxoSmithKline’s R&D organisation measures productivity by the number and innovationestablished economies of the products it creates,USA, Europe and also by the commercial value of the productsJapan. Countries such as Brazil, Russia, India and their ability to address the unmet needs of all consumers. This includes patients, healthcare professionals, budget holders and regulators, each with their own perspective on what constitutes a valuable new product. Further details are given on pages 7 to 17.
Achieve commercial and operational excellenceGlaxoSmithKline links research and commercial operations closely in order to maximise the value of the portfolio. As compounds are developed and tested, marketing campaigns and sales efforts are planned. Where appropriate within markets, the Group aims to build strong relationships with patients and consumersChina – often known as the ultimate usersBRIC markets – have large populations. They are increasingly able to afford good quality healthcare, opening up significant new markets which will be important future growth areas for GSK.
Investing in our people
We will only reach our potential through the support and talent of its medicines.
Common approaches to management processes and business functions are used by an internationally diverse and talented management team in order to create and sustain competitive advantage in all markets. Further details are given on page 18.
Improve access to medicinesGlaxoSmithKline has created extensive programmes designed to improve the healthcare of people who have limited access to medicines both in the developed and developing world.
These are set out in the ‘Improve access to medicines’ section of this report (page 19).
Be the best place for the best people to do their best workThe single greatest source of competitive advantage of any organisation is itshighly motivated people. The Group’sOur ambition is to make itbe the place where great people apply their energy and passion to make a difference in the world. Their skills and intellect are key components in the successful implementation of our strategy. During 2007 we continued to invest in recruiting and training the Group’sbest scientists and other professionals.
| 4 | GSK Annual Report 2007 |
Why do you have a Consumer Healthcare business?
A healthy performance
Consumer Healthcare is an important business to us. Not only does it provide an excellent balance with our Pharmaceuticals operation, it is also a thriving business in its own right which is delivering a strong performance for shareholders.
Consumer Healthcare has shown significant acceleration in top line performance, with sales growth up 14% in 2007. It has a powerful portfolio that includesLucozade,Sensodyne,Panadol,Horlicks andAquafresh, a brand which has benefited from investment and the launch of new brand extensions. 2007 also saw the successful US launch ofalli, the first over-the-counter (OTC) weight loss aid approved by the Food and Drug Administration (FDA), which is currently being reviewed by European regulatory authorities. Through our Consumer Healthcare business, and its expertise in sales and marketing, we are well placed to be the partner of choice for ‘switch’ products, bringing them from the prescription to the OTC market.
Top five Consumer Healthcare products by turnover 2007
| Products | Turnover | |
| 2007 | ||
| £m | ||
| Lucozade | 347 | |
| Aquafresh | 308 | |
| Sensodyne | 293 | |
| Panadol | 262 | |
| Horlicks | 174 | |
Capitalising on long-term potential
Global healthcare markets are in a state of change. For example, there is an increasing trend for governments to cut state healthcare costs by influencing a switch from prescription to generic or OTC products.
Looking ahead, healthcare is becoming more consumer-centred. People expect to be able to access medical knowledge and to influence their own treatments. For many, OTC products are their first destination for everyday healthcare.
We expect that the highest rates of growth for all healthcare businesses will be driven by the developing, emerging economies. OTC is the foundation of healthcare in these countries. In China, for example, OTC accounts for 36% of drug expenditure, compared to 8% in North America and 10% in Western Europe.
| Summary | ||
| Our Consumer Healthcare business is a key part of GSK. It is a profitable, logical, complement to our Pharmaceutical operation with a powerful portfolio and a healthy pipeline. | ||
| • | Outstanding performance in 2007, with double-digit sales growth. | |
| • | Excellent prospects, particularly in developingeconomies. | |
| • | Opportunity to share expertise and resourcesacross the two businesses. | |
| • | Steady, long-term growth helps balance thePharmaceutical business. | |
Sharing strengths
The Consumer Healthcare and Pharmaceuticals businesses are not stand alone entities, but are complementary and synergistic in a number of important areas. They are both backed by science endorsed strategies and a focus on R&D.
There is a growing trend worldwide for patients to manage their own healthcare, choosing OTC products, rather than relying on a prescription – a behaviour in which our Consumer Healthcare professionals are richly experienced. We are able to draw on these skills and knowledge in our Pharmaceutical business and share costs and resources. We also share expertise and resources in other areas, such as regulatory matters, R&D, marketing, distribution and procurement.
Getting the balance right
The Pharmaceuticals business operates in a tough climate. Increased legislation, cautious regulatory regimes and pricing pressures are among the key challenges that face any pharmaceutical company. At the same time, the patent framework for pharmaceutical products tends to result in a relatively short life cycle for even the most successful treatments.
In contrast, our Consumer Healthcare business offers long-term, steady cash flow. A broad portfolio of pharmaceutical and OTC products can help mitigate the impact of losses to generics and help smooth the more volatile nature of the pharmaceutical markets.
| GSK Annual Report 2007 | 5 |
Share prices in the sector
haven’t performed well,
what is the outlook for GSK?
Sector challenges
After many years of sustained value creation for shareholders, the pharmaceutical sector has suffered a de-rating since the beginning of 2001. The main factor behind the de-rating is that R&D productivity, which is integral to the growth of the pharmaceutical industry, has declined. Share price valuations in the past also included more value for the longer-term potential of R&D pipelines than is currently the case.
At the same time, the level of generic competition has intensified. GSK has been able to withstand this pressure better than many of our peers because of the broad nature of our product line, a flow of new products from our pipeline and the greater protection we experience in our vaccines and Consumer Healthcare businesses.
In fact every year since the merger at the end of 2000 we have delivered increased sales, at CER, despite challenging market conditions. In financial terms, over the same period, total returns to shareholders for GSK’s peer group were down 29%. The total return to GSK shareholders over this period was down 15%, above the performance of the peer group.
2007 – theAvandia factor
In 2007 GSK’s share price fell by 5% compared to an increase in the FTSE 100 index of 4%. That was disappointing for our investors, a significant number of whom are also our employees.
We started 2007 strongly and achieved several important milestones including the launches ofTykerband the FDA approval ofalli. In the first quarter, we beat expectations and delivered EPS growth of 14%. As the market received this positive news our share price outperformed most of our peers. Then, in May 2007, an article in the New England Journal of Medicine (NEJM) suggested that there may be cardiovascular risk associated withAvandia, our second largest product. This was followed by intense media coverage and despite our efforts to explain the entirety of the data, which did not confirm this risk, doctors were reluctant to prescribeAvandia for new patients without furtherFDA guidance.
Sales ofAvandia dropped significantly and this had a negative impact on our share price. Following clarification from the FDA in October 2007, we now have a new approved label and can move ahead with more clarity.
| Summary | ||
To ensure that we remain an industry leader, we are addressing the issues which face the pharmaceutical sector. | ||
| • | Investment to achieve industry leading R&Dproductivity. | |
| • | A new £1.5 billion Operational Excellenceprogramme. | |
| • | A 10% increase in the dividend paid to ourshareholders for 2007. | |
| • | The largest share buy-back programme in theindustry. | |
| • | Attracting and retaining the best employees. | |
Taking action to create long-term value
The Board and management continually review GSK’s business strategy and the external environment with a view to achieving growth on a sustainable basis.
Our industry has a long-term investment cycle, driven primarily by the time it takes to develop a new pharmaceutical product – at least 10 years. The decisions taken over the last seven years that have improved R&D productivity at GSK, will still take time to have a major impact on our revenues. However, as investors become more confident in our strategy and key pipeline products make it to the market, this will begin to be factored into our share price.
At the same time, we are very focused on taking action to enhance returns for shareholders by accelerating our efficiency programmes, and returning cash to shareholders through dividends and share buy-backs. The Board approved a 10% increase in its dividend for 2007 and in July, GSK announced the largest share buy-back programme in the industry.
After the third quarter, we announced a significant new £1.5 billion Operational Excellence programme to improve the efficiency and productivity of our operations. This is expected to deliver annual savings of up to £700 million by 2010.
Reducing costs does not mean cutting down on talent. GSK is respected worldwide as a Group where the best people can do their best workand we continue to attract, retain and reward the brightest employees, from sales teams on the front line to scientists who are at the forefront of discovering new therapies.
| 6 | GSK Annual Report 2007 |
How is your research
and development pipeline
performing?
The best year for pharmaceutical R&D since the merger
2007 saw GSK’s best year for R&D since the Group was formed in 2000. We have undoubtedly made great strides in the last seven years – but there remains more to achieve and more benefits which we can look forward to as our investment in the pipeline delivers.
During the year, three new chemical entities and one new vaccine were approved;Veramyst for allergic rhinitis,Tykerb for breast cancer,Altabax for skin infections andCervarix to prevent cervical cancer.
We have progressed a range of products through the pipeline, positioning us well for the future. A total of nine new phase III programmes started. These are the large scale trials where we seek to ascertain safetyand also to prove unequivocally the efficacy of the medicines before submitting them for approval.
Our initiative to in-license potential treatments continued. We brought three new late-stage programmes into GSK and moved a further four into late-stage development, improving our ability to reload and sustain the pipeline we need.
By its nature, R&D carries inherent risk. We were pleased that 2007 was a year of few disappointments, with the most notable termination being that of odiparcil, to prevent blood clots. A number of product line extensions were delayed which we had hoped would gain final regulatory approval in the USA, includingLamictal XR and Requip XL.
Promising progress in vaccines
We have a large and promising vaccines pipeline, with 24 projects in clinical development, including seven in phase III trials and another five filed with regulators.
Cervarix, our HPV vaccine to prevent cervical cancer, has now been approved in over 50 countries across the world. Further licensing applications have been submitted in 28 countries, including Japan. In the USA, the FDA issued a Complete Response letter forCervarixin December 2007. We plan to submit our response to this letter in the second quarter of 2008 and continue our discussions regarding the application with the FDA.
WhileCervarix is perhaps our most high-profile vaccine, several other vaccines made progress during 2007.Rotarix for rotavirus, a disease which causes severe childhood diarrhoea, was filed in the USA in June, following approval in over 100 countries worldwide. We also filedSynflorix, a vaccine to prevent pneumococcal disease, in Europe and International markets at the end of the year. Our meningitis vaccine Men-ACWY and our innovative Mage-A3 vaccine for the treatment of non small cell lung cancer both entered phase III trials in 2007.
| Summary | ||
This has been a good year for our R&D team. A number of important products and potential products moved through our pipeline and we achieved several important objectives. | ||
| • | 34 key assets in phase III/registration. | |
| • | Three new chemical entities approved, and onenew vaccine. | |
| • | 10 new product opportunities filed withregulators. | |
| • | Nine new phase III clinical developmentprogrammes commenced. | |
| • | Three late-stage development programmesin-licensed. | |
In October 2007 we also received encouraging safety and efficacy data with our vaccine to protect against malaria, which is currently in phase II development. These results have given us the confidence to move into large scale phase III trials which are due to begin in the second half of 2008.
Adapting to the changing environment
We are responding in many ways to the challenges of R&D productivity that are faced by companies in the pharmaceutical sector. Our network of CEDDs focus skills and resources on targeted disease areas. The CEDDs create the spirit of a small R&D-led team within a very large pharmaceutical organisation and allow us to be more nimble, and therefore productive, in our approach. In 2007 we opened two new CEDDs, in Immuno-inflammation and Infectious Diseases, both of which are headed by world-class scientists.
An important element of our strategy is to access a broad diversity of thinking. One way we do this is by partnering with academic centres worldwide. In 2007, we opened our new clinical imaging centre at Hammersmith Hospital in London, where research is concentrating on cancer, stroke and neurological diseases. A second key strand is to make sure that GSK is well-represented wherever the most cutting edge science is practised. In 2007, we opened a new fully integrated research institute in China.
GSK has a very active external partnering strategy. In 2007 we entered into nine external product licensing collaborations, together with a number of other partnerships to develop further and utilise novel science and technologies in pharmaceutical and biological R&D.
We continue to review actively our therapeutic area strategies to examine all the areas in which we have a presence and prioritise those that demonstrate the most potential. We aim to derive 20% of our pipeline from biopharmaceuticals by 2015 – it is around 6% at present. We have also increased our investment in neurosciences, vaccines and oncology research.
Whilst it remains a tough challenge to discover medicines and vaccines, the level of understanding, scientific advancement and breakthrough is unprecedented. We believe that at GSK the opportunity to discover new products is now greater than ever.
| GSK Annual Report 2007 | 7 |
What are you doing to
improve healthcare in the
developing world?
Getting the balance right
For a commercial organisation like GSK, there is a balance to be struck between the return to shareholders and our desire to improve access to our products, particularly for patients in the developing world.
HIV/AIDS has both worsened the healthcare crisis in sub-Saharan Africa and brought it worldwide attention. Poverty means that too many are denied education or die from malnutrition and a lack of clean drinking water. The ability of a pharmaceutical company to address the healthcare problems of the developing world must be seen in this broader context.
Where we offer our anti-retrovirals (ARVs) and anti-malarials at not-for-profit prices, this is in addition to our significant community investment activities. Our Corporate Responsibility Report has more details of our efforts to improve access to medicines, in both the developing and the developed world, and information about our other community partnership programmes.
Do more, feel better, live longer
HIV/AIDS, tuberculosis and malaria are killing around 20,000 people every day. We believe that playing our part is not just the right thing to do; it is the only thing to do.
We contribute through action in four areas: preferential pricing of our ARVs, anti-malarials and vaccines; investing in R&D into diseases of the developing world; community investment activities and partnerships that foster effective healthcare; andthrough innovative partnerships.
Sometimes, the healthcare crisis in Africa is used by some pressure groups to attack our industry or the intellectual property (IP) system. But it is important to understand that we rely on IP to generate the funds which enabled us to invest £3.2 billion in R&D during 2007. We will continue to stress this to those who would like to see the IP environment weakened.
Without investment in R&D we will not see the much-needed new medicines and vaccines. This requires a delicate balance – which we believe we achieve - to the benefit of shareholders and patients the world over.
| Summary | ||
| GSK is an industry leader in providing access to medicines in the developing world. | ||
| • | Preferential pricing ensures that the poorest canstill benefit from our treatments and vaccines. | |
| • | Our investment in R&D is helping to build arich pipeline which reflects the needs of thedeveloping world. | |
| • | Innovative partnerships have created breakthroughsin treatments and vaccines for neglected diseases. | |
| • | Community investment activities help promoteeducation and better healthcare. | |
| • | GSK is also actively involved in supportingpatients in the developed world - see page 23. | |
Preferential pricing
We have provided our vaccines at preferential prices to the developing world for over 20 years.
Our HIV/AIDS and malaria treatments are offered at not-for-profit prices to public sector customers and not-for-profit organisations in all the Least Developed Countries and all of sub-Saharan Africa. Including Global Fund and other eligible programmes, our not-for-profit prices are now available in around 80 countries.
Innovative partnerships
For products with no viable commercial market, such as truly neglected tropical diseases, we work environment supports an informed, empoweredin public-private partnerships. We provide the R&D, technology, manufacturing and resilient workforce,distribution expertise while academic institutions provide research and disease area knowledge. Public sector partners, governments, or organisations such as the Gates Foundation, help fund the project and assist in getting the medicines to the people who need them. Funds are usually channelled through organisations such as the TB Alliance and the Malaria Vaccine Initiative.
These programmes have transformed R&D in neglected diseases. For example, the pipeline for malaria treatments is now the richest the world has ever seen.
We have granted voluntary licenses to allow generic manufacturers to produce their own versions of our key ARVs for HIV/AIDS. There is now global capacity to manufacture enough ARVs to meet the world’s needs – the challenge is to get the medicines to the people who need them.
Community investment
January 2008 saw the 10th anniversary of our commitment to eliminate lymphatic filariasis (LF), also known as elephantiasis. To date we have reached over 130 million people, and 24 million children have been born in areas that are now LF-free.
We also currently support significant HIV/AIDS education programmes in Africa, India, China and Mexico. Each programme faces different challenges, but the importance of education among people marginalised by society is common to all.
Further community investment programmes include Personal Hygiene and Sanitation Education (PHASE), which focuses on how the simple act of washing hands can prevent diarrhoeal disease and save lives.
| 8 | GSK Annual Report 2007 |
| REPORT OF THE DIRECTORS | |
| Business review | |
| Business review | |
The business review discusses GSK’s financial and non-financial activities, resources, developments and performance during 2007 and outlines the trends and factors which are likely to affect its future development.
Accounting presentation
This report is prepared in accordance with International Financial Reporting Standards (IFRS), as adopted by the European Union and also with IFRS as issued by the International Accounting Standards Board.
Data for market share and market growth rates are GSK estimates based on the most recent data from independent external sources, and where appropriate, are valued in Sterling at relevant exchange rates. Figures quoted for product market share reflect sales by GSK and licensees.
Business performance
Business performance, which is a supplemental non-IFRS measure, is the primary performance measure used by management and is presented after excluding costs relating to the new Operational Excellence programme, which commenced in October 2007. Management believes that exclusion of these items provides a better reflection of the way in which the Group valuesbusiness is managed and draws on the diverse knowledge, perspectives, experience, and stylesgives a more useful indication of the global community. Further details areunderlying performance of the Group. This information, which is provided in addition to the total results prepared under IFRS, is given on page 20.to assist shareholders to gain a clearer understanding of the underlying performance of the business and to increase comparability for the periods presented.
Invest in communitiesExchange ratesGlaxoSmithKline continues to build on its history of community investment programmes. These provide support for better healthcare delivery and education in under-served communities around the world. The Group does this through active engagement with numerous external stakeholders including the World Health Organisationoperates in many countries and membersearns revenues and incurs costs in many currencies. The results of the not-for-profit community. It funds community-led initiatives acrossGroup, as reported in Sterling, are affected by movements in exchange rates between Sterling and other currencies. Average exchange rates prevailing during the worldperiod are used to translate the results and donates medicinescash flows of overseas subsidiaries, associates and joint ventures into Sterling. Period end rates are used to support humanitarian effortstranslate the net assets of those entities. The currencies which most influence these translations are the US dollar, the Euro and community-based healthcare. Many of the programmes are long-term commitments that help bring about sustainable change in communities. Further details are given on pages 21 to 22.
Commit to corporate responsibilityGlaxoSmithKline is committed to connecting business decisions to ethical, social and environmental concerns. Thus, corporate responsibility is an integral and embedded part of the way we do business.Japanese Yen.
In 2003, GlaxoSmithKline published a setorder to illustrate underlying performance, it is the Group’s practice to discuss its results in terms of Corporate Responsibility Principlesconstant exchange rate (CER) growth. This represents growth calculated as if the exchange rates used to provide guidance ondetermine the standards to whichresults of overseas companies in Sterling had remained unchanged from those used in the Group is committed. This sets out the approach to ten areas: standardsprevious year. CER% represents growth at constant exchange rates. £% represents growth at actual exchange rates.
All commentaries in this Report are presented in terms of ethical conduct, research and innovation, products and customers, access to medicines, employment practices, human rights, community investment, caring for the environment, leadership and advocacy, and engagement with stakeholders. The Group reports annually on progress in upholding these principles in its Corporate Responsibility Report, which is available on the website at www.gsk.com.CER unless otherwise stated.
| GSK Annual Report 2007 | 9 |
| 2007 performance overview | |
| 2007 performance overview | |
| GSK’s performance is driven by a number of important strategies | |
| Key performance indicators | |
| Turnover, business |
| Optimising the performance of marketed products | ||
| Both the Pharmaceutical and Consumer Healthcare businesses focus on ways to improve the return from the Group’s intellectual property by maximising sales of key products. | ||
GSK’s activities include: | ||
| • | achieving worldwide sales force excellence | |
| • | achieving Pharmaceutical and Consumer Healthcaremarketing excellence | |
| • | maintaining the highest ethical standards | |
| • | improving the cost-effectiveness of operations | |
| Delivering the product pipeline for patients | ||
| GSK aims to create the best product pipeline in the industry for the benefit of society. This includes developing a focused strategy to support the pipeline and manage the full life cycle of compounds from launch as prescription medicines through to potentially becoming over-the-counter products. | ||
| GSK measures R&D productivity by the number and level of innovation of the products it creates, and by the ability to address unmet patient needs. | ||
Build the best product pipeline in the industry
Research and development – Pharmaceuticals
Research and Development (R&D) operates on a global basis, employing over 15,000 staff at sites mainly in the UK and the USA but also in Belgium, Canada, France, India, Italy, Japan, and Spain. In addition, R&D has partnerships with other companies worldwide in order to benefit from the particular skills and expertise that are available in particular locations.
Focus on the patientGlaxoSmithKline’s strategic intent is to become the indisputable leader in the industry. Its success is dependent on a vibrant, productive R&D function supporting existing products and developing new ways to help patients. R&D is increasingly seeking the views of patients to understand the most important aspects of their disease and the impact it has on their lives. In addition to discussions with key opinion leaders, GlaxoSmithKline is devoting more resource to a dialogue with patients and their families. This information may then be used to shape drug development programmes. Once a new medicine is ready for launch, GlaxoSmithKline then knows it will bring clear benefit to patients’ lives.
ProductivityA continued high priority during 2004 has been the challenge of increasing productivity, both through improving science and through managing the entire R&D organisation so that its resources are optimally focused on the discovery and development of new medicines. Some of the scientific initiatives that have enhanced productivity are discussed below. Programmes to identify association between diseases and genes have facilitated the linkage of cellular targets to disease, identifying for GlaxoSmithKline the areas of research that are most likely to produce new ways of helping patients. Increased automation in the screening of compounds has provided more lead compounds more quickly and of higher quality than before. Further improvements have been made in imaging techniques to allow early decisions on which compounds to progress. In addition, the greater use of automation in the laboratory environment and expansion of the electronic collection of clinical trial information allow scientists to become more productive throughout the discovery and development process.
GlaxoSmithKline’s product development pipeline, set out on pages 14 to 17, shows considerable breadth and depth. At the end of February 2005 GlaxoSmithKline had 195 pharmaceutical and vaccine projects in development of which 140 are in the clinic.
Finding candidate compounds
Early research and the role of geneticsThe early stages of finding new medicines requires essentially two components; targets that can be shown to affect mechanisms of important pathological processes in human disease, and compounds able to modulate the behaviour of specific targets. As part of this target validation process, GlaxoSmithKline aims to identify the genes most relevant to common diseases with large unmet medical needs and major patient burdens.
Many diseases arise through complex interactions between a number of gene variants and environmental factors, so the challenge is significant. Identifying the genes that predispose patients to a particular disease and understanding their roles in its progression lead to new ways to intervene in these diseases. Genes of interest have been identified for asthma and non-insulin dependent diabetes. Further genetic association studies in well phenotyped patients are under way in schizophrenia, unipolar depression, obesity, Alzheimer’s disease, rheumatoid arthritis, osteoarthritis, metabolic syndrome, chronic obstructive pulmonary disease (COPD), coronary artery disease and acute coronary syndrome.
GlaxoSmithKline is justly proud of its reputation for applied scientific excellence and is at the forefront of many advances which are harnessed to find new medicines as quickly as possible. One example of where the Group is helping to move the understanding of disease processes forward is the development of imaging techniques that may be validated to act as surrogate markers for disease. This allows increasingly accurate prediction of the clinical effect of lead molecules and drug candidates before embarking on the later stages of development and thus more efficient use of resources.
Discovery ResearchDiscovery Research (DR) produces the lead compounds that form the basis of drug discovery efforts in the Centres of Excellence for Drug Discovery (CEDDs). In 2004, DR has provided the CEDDs with over 45 high-quality new lead compounds with activity against defined targets. Investment in DR has been focused on increasing the quality and quantity of the lead compounds available.
This year, R&D has completed the current phase of its investment in automation with the opening of a new combined facility for high-throughput screening and high-throughput chemistry in Upper Providence, USA. This has enabled the screening of over one million compounds in 2004, with a success ratio that has consistently increased over the investment period. In addition, a Molecular Imaging Centre of Excellence (MICE) in Upper Merion, USA was opened, providing a platform to develop non-invasive, multi-modal imaging technologies for preclinical applications.
| Being the best place for the best people to do their best work | |||
| GSK is committed to creating the best place for the best people to do their best work by: | |||
| • | recruiting and developing the best people in the industry | ||
| • | supporting a culture of high reward for high performance | ||
| • | ensuring good communication and employee involvement | ||
| • | maintaining a diverse and healthy workforce | ||
| Improving access to medicines | |||
| GSK is finding innovative ways to bring medicines, vaccines and health education to patients in all countries, including those suffering from epidemics and neglected diseases. | |||
| Maximising total shareholder return (TSR) | |||
Build the best product pipeline in the industrycontinued
Product submissionsA number of significant dossiers were submitted to the regulatory authorities in the major regions during 2004 which are summarised in the table below.
Product approvalsIn 2004, approvals were received for a number of new products, as summarised in the table below.
| share repurchases. | ||
Selecting the best candidate molecules
Centres of Excellence for Drug DiscoveryThere are two fundamental steps in turning a lead compound into a drug candidate: (i) optimising it for potency, efficacy, safety and other intrinsic characteristics of the molecule, and (ii) demonstrating the validity of the therapeutic hypothesis through early clinical trials of the resulting candidate. These steps are facilitated by rapid, informed decision-making and creative solutions to the issues that inevitably arise in this phase of development. The CEDDs are focused on specific disease areas. They are designed to be nimble and entrepreneurial with the range of skills and resources required to drive mid-stage development projects from lead optimisation through to their key decision point, demonstration of proof of concept, before major investments are made to fund large-scale clinical trials.
There are seven CEDDs, based in Europe and the USA:
Each CEDD is responsible for identifying the optimal drug candidate for the desired biological effect and then assessing its safety and other development characteristics in preclinical screens, some of which may involve using animals. Once this is achieved, the CEDDs are responsible for proving that the compound is safe and efficacious in patients in small-scale clinical trials – the proof of concept decision point.
A decision is then made on whether the information available to date justifies the compound’s progression into late-stage drug development where the necessary large-scale clinical trials are conducted to register and commercialise the product.
A major investment was announced in September 2004 to establish a preclinical research facility for neurodegenerative diseases in Singapore. The facility, which will have a team of 30 to 35 scientists, will focus on new therapies in the treatment of neurodegenerative illnesses such as Alzheimer’s disease and Parkinson’s disease as well as schizophrenia.
In 2004, the CEDDs continued to progress significant numbers of new compounds into both first dosing in humans and initial evaluation of efficacy in patients.
Converting candidates to medicines
Preclinical developmentPreclinical Development (PCD) participates in a wide range of activities within the drug development process from optimising the selection of compounds for potential development through launch to the marketplace and enhancement of existing products by devising more convenient formulations.
Early in the development process, the metabolic rate and safety of compounds are evaluated in laboratory animals prior to testing in humans. The testing required in both animals and humans is mandated and is highly regulated by governmental agencies (see Animals and research on page 13).
PCD researchers investigate appropriate dosage forms (e.g. tablet or inhaled) and develop formulations to enhance the drug’s effectiveness and to facilitate the ease of use by the patient. Processes and supporting analytical methods for drug synthesis and product formulation and delivery are scaled up to meet increasing supply requirements, ultimately leading to the technical transfer of the processes and methods to manufacturing. The New Product Supply Process, a partnership between R&D and Global Manufacturing and Supply, ensures that a robust product is developed for large-scale commercial manufacturing and launch.
Also improving R&D’s productivity are new drug delivery systems, predictive technologies, particle engineering and process innovation. The use of particle engineering and process innovation enhances the ability to manufacture consistently high-quality products efficiently.
Worldwide developmentTo provide focus for the development process, all the major functional components of clinical, medical, biomedical data, regulatory and safety are integrated into a single management organisation, Worldwide Development (WWD).
During 2004 the creation of the Medicine Development Centres (MDCs), which provide a focus for late-stage development, was completed and embedded in the organisation. The MDCs are responsible for creating value through the delivery of full product development plans, managing the day-to-day operational activities for the late-stage development portfolio, maximising the global commercial potential of products by optimising the delivery of the portfolio, and ensuring strong partnerships with the CEDDs and Global Commercial Strategy (GCS) in order to deliver differentiated products of value.
Throughout the development process, the Regulatory function maintains a dialogue with the regulatory agencies in the major markets to ensure that the development programme is best focused to generate the data that is required for the grant of licences. This dialogue also facilitates GlaxoSmithKline’s ability to respond efficiently to emerging requirements for safety and efficacy data.
The R&D model
 | |
| 10 |
Build the best product pipeline in the industrycontinued
The MDCs are based at the major US and UK sites and are therapeutically aligned as follows:
These matrix teams are responsible for maximising the worldwide development opportunities for each product within their remit so that all the information needed to support the registration, safety programmes, pricing and formulary negotiations is available when it is required. Commercial input from Global Commercial Strategy ensures that at an early stage regional marketing needs are fully integrated into any development plans. Careful prioritisation across all phases of development ensures that a high potential and integrated portfolio is achieved in the context of patient needs.
The MDCs collaborate at an early stage with the CEDDs to define target product profiles for new molecules and with integrated technical development and manufacturing functions to ensure rapid, effective launch and delivery of the product to patients. Innovative clinical programmes for lead molecules from the CEDDs are developed using cross-functional project teams. In these programmes, one key measure of productivity is the number of active subjects in clinical trials each year. WWD has increased the number of active subjects in clinical trials significantly over the last three years in order to keep up with the increasing need to demonstrate the safety and efficacy of its products.
The Gold Pass designation for assets of high value and strategic importance to GlaxoSmithKline, requiring specific organisational visibility and urgency to meet patients’ needs, continued through 2004. Because of the way in which the organisation’s resources are focused on these developments, only a small number of assets receive Gold Pass status at any one time, enabling the organisation to be fully aligned. Two products, radafaxine (353162) for depression and lapatinib (572016) for cancer continued to progress and three further projects received the Gold Pass status during the year.
One of these combines 159797, a new long-acting beta-agonist and 685698, a new inhaled corticosteroid for the treatment of asthma and COPD. The second is the chemokine receptor antagonist 873140 for HIV infection and the third project is the cyclo-oxygenase 2 inhibitor 406381.
Development and the role of geneticsGlaxoSmithKline believes that pharmacogenetic research, which is the correlation of genetic data with response to medicine, will provide valuable information to help improve decision making during drug development, thus having a positive impact on key causes of pipeline attrition (i.e. lack of efficacy and adverse drug reactions) and clinical trial design. As a result, R&D is collecting samples in clinical development studies to identify pharmacogenetic information that can help predict a patient’s response. Prospectively collected efficacy and safety studies during clinical trials have become standard elements of development.
This information is intended to define patient groups who are likely to respond best to treatment, or individuals who are most likely to suffer an adverse event, as the compound progresses through development in the clinic.
Pharmacogenetic-based information will provide prescribing physicians with key information to help them select the medicine and dose most likely to be of therapeutic benefit to their patients.
Clinical trial governanceIn conducting the clinical trials required to show that medicines are safe and effective, GlaxoSmithKline’s first priority is to protect the participants and future patients. All clinical trials sponsored by the Group, irrespective of where they take place, are conducted according to international standards of good clinical practice and applicable laws and regulations. The protocols are reviewed by the external regulatory agencies in the relevant countries where required and all protocols are considered by an Ethics Review Committee whose remit covers the site where the study will take place. Safety data is routinely collected throughout development programs and is reported to national and regional regulatory agencies in line with applicable regulations. Additionally it is reviewed internally for any safety signals. The GlaxoSmithKline Global Safety Board is responsible internally for both approving pivotal studies and investigating any issues related to patient safety that arise during the development programme. In addition, the Clinical Compliance department monitors compliance with Good Clinical Practice standards during the conduct, analysis and reporting of clinical trials. Its remit covers GlaxoSmithKline sites running trials as well as Clinical Research Organisations (CROs) and investigators performing clinical research on the Group’s behalf. The results of these audits are regularly reviewed by the R&D Global Risk Management Compliance Board and by the Audit Committee.
During 2004 GlaxoSmithKline took another step to make information from its clinical trials widely and easily available when it established its Clinical Trial Register as a public website on which clinical trials data is published. Regulatory authorities around the world will continue to be fully informed of the data that are generated so that they can be reassured as to the safety and efficacy of GlaxoSmithKline’s products but the Clinical Trial Register will enhance the ability of clinicians to make informed clinical judgements to benefit their patients.
Global commercial strategyThe Global Commercial Strategy (GCS) organisation provides integrated global commercialisation and strategic direction within R&D, as well as supporting the development of regional marketing campaigns for products emerging from R&D to maximise portfolio value through the full product life cycle. In addition, data are generated supporting the added value of products through assessments of improvements to the quality of patients’ lives and reductions in the overall costs of healthcare from the use of GlaxoSmithKline’s products.
Extending the use of existing productsOnce a product has been launched, it is important to establish additional ways in which patients can be helped through investigating whether any other illnesses may be treated or by the development of additional dosage forms which are more convenient for patients. Some of these developments reflect feedback from patients and the medical professions; others are the result of continuing research into disease and its causes.
Line extension submissionsA number of product line extensions were submitted to the regulatory authorities in the major regions during 2004, which are summarised in the table below.
Line extension approvalsIn 2004 approvals were received for a number of significant new indications and formulations for existing products, which are summarised in the table below.
Build the best product pipeline in the industrycontinued
Examples of lifecycle management include the new indication for Seretide/Advair making this important asthma medicine available for use in children between 4–11 years and Kivexa/Epzicom, a single tablet combining the active molecules used in two successful treatments for HIV in order to simplify dosing for patients. Line extensions form a significant part of the overall portfolio; recent examples such as Augmentin ES/XR, Seroxat/Paxil CR and Wellbutrin XL, achieved £1,038 million sales in 2004.
A number of product line extensions were submitted to the regulatory authorities in the major regions during 2004. These submissions are summarised on page 11.
In 2004 approvals were received for a number of significant new indications and formulations for existing products. These approvals are summarised on page 8.
Managing the portfolioThe resources available to exploit opportunities arising from within the Group will always be limited. Improving productivity progresses more compounds into later phases of development, consequently putting demands on R&D resources. It is therefore that much more important to look objectively at the portfolio and ensure that the progress of assets is prosecuted as efficiently as possible. The key projects reaching significant milestones are reviewed each month by the Product Management Board (PMB), which is responsible for determining whether an individual asset has achieved the pre-set criteria to pass into the next phase of development. This body is led jointly by the chairman of R&D and the president of Pharmaceutical Operations and includes the presidents of the Regions and Global Manufacturing and Supply, in addition to the heads of the major functions within R&D.
The PMB also actively manages the overall portfolio through the annual portfolio review exercise. This thorough and careful assessment of all of the assets in Drug Discovery and Worldwide Development leads to a prioritisation of projects on the basis not only of commercial value, but also of unmet medical need. This also allows the identification of alternative approaches to balance the Group’s assets most efficiently, including the use of external partners in development and out-licensing products that no longer fit within the strategic portfolio.
Following the annual portfolio prioritisation reviews, the CEDDs are able to select which programmes to pursue internally. Other assets may be developed through a novel partnership scheme known as the Alternative Discovery Initiative (ADI). GlaxoSmithKline and its partners can share risk and reward through various business arrangements.
The ADI partnerships with biotechnology companies and other pharmaceutical companies to explore different approaches to drug discovery that were formed in recent years continue to provide increased opportunities to exploit the productivity from our new technologies. In 2004, additional focus was placed on ADIs by adding to the Tanabe collaboration and forming new partnerships with NiKem Research (central nervous system), Diversa Corp. (anti-infectives), Toyama Chemical Co Ltd (antibacterials) and Meiji Seika Kaisha Ltd.
Collaborative ADI partnerships from earlier are: Cytokinetics Inc. (oncology: mitotic kinesin inhibitors), Shionogi & Co., (HIV and neurology programmes; potential broad-based discovery collaboration in antimicrobials, oncology, metabolic and neurology), Tanabe Seiyaku Co. Ltd. (broad-based: neurology, GI, urology, diabetes, respiratory) , Exelixis Inc. (oncology, inflammation), Theravance Inc. (asthma), Ranbaxy Laboratories Ltd. (broad based) and NeuroSearch (central nervous system). ADI partnerships have also been established with three academic institutions to supplement internal target validation activities and provide better access to tissue samples and patient populations for clinical studies. GlaxoSmithKline has one academic ADI partner in the UK and two in the USA. These are long term collaborative relationships to which the Group has committed funding for two years, with option to renew for an additional three years.
In-licensing and research collaborationsGlaxoSmithKline has continued to identify compounds that would enhance the portfolio and to create innovative collaborations to ensure that the Group is regarded as the partner of choice for both large and small companies.
The subjects of in-licensing or co-marketing / co-promotion agreements in 2004 were:
In addition, GlaxoSmithKline has already entered into a number of agreements with third parties to co-develop and then co-market certain compounds. These arrangements range from milestone payments to third parties to acquire rights to their intellectual property, to joint ventures to develop and commercialise specified compounds. Under many of these agreements the Group has obligations to make payments in the future if specified milestones are achieved. These financial commitments are summarised in Note 26 to the Financial statements, ‘Commitments’.
DiscontinuationsAll R&D carries a risk of failure commensurate with the extension of scientific knowledge of a compound and its effects. Not all lead compounds that are identified to possess positive activity against a validated target will prove to be safe enough to introduce to humans or feasible to manufacture on a commercial scale. GlaxoSmithKline R&D endeavours to ensure that as far as possible these risks are ameliorated by extensive predictive testing as early as possible in the development process. Despite these efforts, the ultimate test for a product remains the point at which it is administered to large numbers of patients with the disease.
Late-stage projects terminated during 2004 in Phase II include 493838 for neuropathic pain, vestipitant (597599) for dyspepsia, depression and anxiety, piboserod for atrial fibrillation and talnetant for over-active bladder.
Research and development - vaccines
All vaccines R&D is conducted at GlaxoSmithKline’s biologicals centre in Rixensart, Belgium, including other related activities such as clinical development, regulatory strategy, commercial strategy, scaling up, packaging and all support functions and primary production of all vaccines with the exception of influenza vaccine, which is produced at the Group’s state-of-the-art facility in Germany. Over 1,000 scientists are employed who are devoted to discovering new vaccines and developing more cost-effective and convenient combination vaccines to prevent infections that cause serious medical problems worldwide. Discovery work involves many collaborators in academia and the biotech industry worldwide and allows identification of new vaccine candidates which are then expressed in yeast, bacteria or mammalian cells and purified to a very high level.
This is followed by formulation of the vaccine, which involves mixing antigens with selected novel proprietary adjuvants, which are designed to stimulate a good and appropriate immune response in humans. The next step is to evaluate safety and efficacy of the candidate vaccine, which may involve using animals.
Once preclinical proof of concept has been established, the candidate vaccine is then tested in clinical trials in healthy individuals to evaluate safety and how effective the vaccine is in inducing an immune response to protect the body from disease encountered later in a natural setting. Large-scale field trials in healthy individuals follow to establish safety and efficacy in a cross section of the population. The results obtained during clinical trials and the development of a quality production process and facilities are then combined into a regulatory file which is submitted to the authorities in the various countries where the vaccine is to be made available.
In 2004 biologicals, which has a long track record of developing and making vaccines available to the developing world at preferential prices, pioneered a new “South First” vaccine strategy for its new rotavirus vaccine. This involved developing a totally unique and novel clinical and regulatory strategy to ensure this vaccine was first registered and made available to those areas of the world where the medical need is greatest.
Recently, Cervarix, a vaccine for the prevention of cervical cancer received Gold Pass status. See page 10 for further details of the Gold Pass programme.
Diseases of the developing world
Continued investment in research into diseases that affect the developing world is essential if there is to be a long-term improvement in the healthcare of people who live in these regions; this will include the resolution of challenges such as drug resistance and poor patient compliance. As part of GlaxoSmithKline’s response to this challenge the Microbial, Musculoskeletal & Proliferative Diseases CEDD has responsibility for a drug discovery unit, dedicated to finding new medicines for these diseases, based at Tres Cantos, Spain. The work undertaken in Tres Cantos focuses on malaria and tuberculosis which, together with work elsewhere in the Group on HIV/AIDS and vaccines, means GlaxoSmithKline is addressing the prevention and treatment of all three of the World Health Organization’s (WHO) top priority diseases.
The Group currently has 14 R&D projects and programmes of relevance to the developing world, seven of which are aimed at producing vaccines and medicines for diseases that disproportionately affect developing countries.
The Group also works in close collaboration with external partners worldwide in the search for new treatments for diseases of the developing world. Partnerships here are key in order to maximise the combined expertise and talent of the pharmaceutical industry and academia in discovering and developing new medicines for the developing world.
Public/private partnerships remain essential to fund research where there is no commercially viable market for a potential product. The Group continues to work closely with many Governments, United Nations’ agencies and other global funding bodies in this area. For example, in 2004, GlaxoSmithKline’s pyridone project was awarded the Medicines for Malaria Venture “Project of the Year” for its rapid and successful progress in finding a drug candidate. The newly selected candidate has since moved into pre-clinical development.
Animals and research
For ethical, regulatory and scientific reasons, research using animals remains a small but vital part of research and development of new medicines and vaccines. GlaxoSmithKline only uses animals where there is no alternative and only in the numbers required for each test. The Group strives to exceed regulatory standards in the care and use of the animals it uses and undergoes internal and external review to assure these standards.
The vast majority of the experimental methods do not use animals and GlaxoSmithKline is actively engaged in research to develop and validate more tests that either avoid the use of animals in research or reduce the numbers needed. When animals are used in research unnecessary pain or suffering is scrupulously avoided.
GlaxoSmithKline understands that use of animals for research purposes commands a high level of public interest. The GlaxoSmithKline Public Policy Position ‘The care and ethical use of animals in research’, and further information and reports, are available on the website, www.gsk.com or from Secretariat.
Build the best product pipeline in the industrycontinued
The chart below shows GlaxoSmithKline’s new chemical entities (NCE), product line extensions (PLE) and vaccine pipeline evolution for projects in the clinic since 2001. It shows increased levels of productivity particularly in Phase II. This is expected to lead to an increase in Phase III and registrations in the coming years.
Phase I NCEs with multiple indications are only counted once. NCEs in later phases are counted by each indication.
Product development pipelineThe product development pipeline, set out on the following three pages shows considerable breadth and depth. At the end of February 2005, GlaxoSmithKline had 195 pharmaceutical and vaccine projects in development, of which 140 are in the clinic comprising 88 new chemical entities, 32 product line extensions and 20 vaccines. The content of the drug development portfolio will change over time as new compounds progress from discovery to development and from development to the market. Owing to the nature of the drug development process, many of these compounds, especially those in early stages of investigation, may be terminated as they progress through development. For competitive reasons, new projects in pre-clinical development have not been disclosed and some project types may not have been identified.
Key
Estimated filing dates Compound/Product Type Indication Phase MAA NDA Cardiovascular, Metabolic & Urogenital 659032† Lp-PLA2 inhibitor atherosclerosis I 677116† Lp-PLA2 inhibitor atherosclerosis I 681323 p38 kinase inhibitor atherosclerosis (also rheumatoid arthritis & COPD) I 813893 factor Xa inhibitor prevention of stroke in atrial fibrillation I 480848† Lp-PLA2 inhibitor atherosclerosis II 493838 adenosine A1A agonist dyslipidaemia II 501516† PPAR delta agonist dyslipidaemia II odiparcil† indirect thrombin inhibitor prevention of thrombotic complications of II cardiovascular disease & deep vein thrombosis (DVT) prophylaxis Arixtra synthetic factor Xa inhibitor treatment of acute coronary syndrome III 2006 2006 Coreg CR† beta blocker hypertension & congestive heart failure – once daily III N/A 2005 Noratak† recombinant B-type natriuretic peptide acute heart failure lll 2007 N/A Arixtra synthetic factor Xa inhibitor prevention of DVT – abdominal surgery Submitted S:Jul04 S:Jul04 Arixtra synthetic factor Xa inhibitor prevention of DVT – medical conditions Approved A:Jan05 S:Feb04 Arixtra synthetic factor Xa inhibitor treatment of DVT Approved A:Nov04 A:Jun04 Metabolic projects 189075† sodium dependent glucose transport type 2 diabetes I (SGLT2) inhibitor 856464 melanin concentrating hormone antagonist obesity I 677954 PPAR pan agonist type 2 diabetes II 823093 DPP IV inhibitor type 2 diabetes II 869682† SGLT2 inhibitor type 2 diabetes II solabegron (427353) beta3 adrenergic agonist type 2 diabetes (also over-active bladder) II Avandamet XR PPAR gamma agonist plus metformin type 2 diabetes – extended release III 2005 Avandaryl† PPAR gamma agonist plus sulphonylurea type 2 diabetes – fixed dose combination Approvable 2005 AL:Aug04 Infectious Diseases 565154 oral pleuromutilin treatment of respiratory tract infections I 270773† phospholipid anti-endotoxin emulsion sepsis II chlorproguanil, dapsone + antifolate + artemisinin treatment of uncomplicated malaria II 2007 N/A artesunate (CDA)† 275833 topical pleuromutilin bacterial skin infections III 2006 2005 sitamaquine 8-aminoquinoline treatment of visceral leishmaniasis III N/A Etaquine† 8-aminoquinoline malaria prophylaxis (adults) III TBD 2007 Anti-virals 825780† DNA antiviral vaccine HIV infections I 640385† aspartyl protease inhibitor HIV infections II 695634 non-nucleoside reverse transcriptase inhibitor HIV infections II 2007 2007 873140† CCR5 antagonist HIV infections II 2007 2007 Epzicom/Kivexa† reverse transcriptase inhibitor HIV infections – combination tablet Approved A:Dec04 A:Aug04 Musculoskeletal, Inflammation, Gastrointestinal & Urology 423557† calcium antagonist osteoporosis I 423562† calcium antagonist osteoporosis I 462795† cathepsin K inhibitor osteoporosis & osteoarthritis I 679769 NKI antagonist urinary incontinence (UI) (also depression & anxiety, chemotherapy induced & postoperative nausea & vomiting) I 681323 p38 kinase inhibitor rheumatoid arthritis (also atherosclerosis & COPD) I 768974† parathyroid hormone agonist osteoporosis I 856553 p38 kinase inhibitor (oral) rheumatoid arthritis (also COPD) I 876008† corticotrophin releasing factor (CRFI) antagonist irritable bowel syndrome (IBS) also depression & anxiety I Entereg† peripheral mu-opioid antagonist IBS I solabegron (427353) beta3 adrenergic agonist over-active bladder (also type 2 diabetes) I 2007 2007 270384 endothelial cell adhesion molecule inhibitor inflammatory bowel disease II 274150 selective iNOS inhibitor rheumatoid arthritis (also migraine, asthma) II 683699† dual alpha4 integrin antagonist (VLA4) inflammatory bowel disease (also multiple sclerosis) II talnetant NK3 antagonist IBS (also schizophrenia) II 2007 2007 Avandia PPAR gamma agonist rheumatoid arthritis II Entereg† peripheral mu-opioid antagonist chronic opiate induced bowel dysfunction & constipation II 2007 2007 mepolizumab anti-IL5 monoclonal antibody hypereosinophillic syndrome (also asthma & eosinophilic esophagitis) III 2006 2006 Avandia PPAR gamma agonist psoriasis III Avodart + alpha blocker 5-alpha reductase inhibitor plus alpha blocker benign prostatic hyperplasia – fixed dose combination III 2007 2007 Avodart 5-alpha reductase inhibitor reduction in the risk of prostate cancer III Boniva/Bonviva bisphosphonate treatment of postmenopausal osteoporosis Submitted 2005 S:Dec04 – intermittent i.v. dosing Boniva/Bonviva bisphosphonate treatment & prevention of postmenopausal osteoporosis Submitted S:Sep04 S:May04 – monthly oral dosing Entereg† peripheral mu-opioid antagonist post operative ileus Submitted 2005 S:Jun04 Vesicare† muscarinic antagonist overactive bladder Approved N/A A:Nov04
Build the best product pipeline in the industrycontinued
| Estimated filing dates | |||||||||||
| Compound/Product | Type | Indication | Phase | MAA | NDA | ||||||
| Neurosciences | |||||||||||
| 189254 | Histamine H3 antagonist | dementia | I | ||||||||
| 234551* | endothelin A antagonist | stroke | I | ||||||||
| 274150 | selective iNOS inhibitor | migraine (also rheumatoid arthritis, asthma) | I | ||||||||
| 406725 | gap junction blocker | migraine, epilepsy & neuropathic pain | I | 2007 | 2007 | ||||||
| 644784 | dual acting COX-2 inhibitor | acute & chronic pain conditions including neuropathic | I | ||||||||
| pain (also schizophrenia) | |||||||||||
| 705498 | vanilloid 1 antagonist | acute migraine | I | ||||||||
| 737004* | endothelin A antagonist | stroke | I | ||||||||
| 742457 | 5HT6 antagonist | schizophrenia & dementia | I | ||||||||
| 773812 | mixed 5HT/dopaminergic antagonist | schizophrenia | I | ||||||||
| 823296 | NK1 antagonist | depression & anxiety | I | ||||||||
| 842166 | non-cannabinoid CB2 agonist | inflammatory pain | I | ||||||||
| 876008† | corticotrophin releasing factor (CRF1) antagonist | depression & anxiety (also IBS) | I | ||||||||
| radafaxine (353162) | noradrenaline/dopamine re-uptake inhibitor | fibromyalgia & neuropathic pain | I | ||||||||
| Requip XR | non-ergot dopamine agonist | restless legs syndrome (RLS) | I | 2006 | 2006 | ||||||
| radafaxine (353162) | noradrenaline/dopamine re-uptake inhibitor | depression | II | 2007 | |||||||
| radafaxine (353162) | noradrenaline/dopamine re-uptake inhibitor | RLS | II | ||||||||
| 372475 (NS2359)† | triple (5HT/noradrenaline/dopamine) re-uptake inhibitor | depression | II | ||||||||
| 406381 | dual acting COX-2 inhibitor | acute & chronic pain & migraine | II | TBD | TBD | ||||||
| 468816 | glycine antagonist | smoking cessation | II | ||||||||
| re-uptake inhibitor | |||||||||||
| 679769 | NK1 antagonist | depression & anxiety (also chemotherapy induced | II | ||||||||
| & postoperative nausea & vomiting and UI) | |||||||||||
| 683699† | dual alpha4 integrin antagonist (VLA4) | multiple sclerosis (also inflammatory bowel disease) | II | ||||||||
| vestipitant (597599) | |||||||||||
| + paroxetine | NK1 antagonist + selective serotonin | depression & anxiety | II | ||||||||
| talnetant | NK3 antagonist | schizophrenia (also IBS) | II | ||||||||
| Avandia | PPAR gamma agonist | Alzheimer's disease | II | ||||||||
| Lamictal | sodium channel inhibitor | bipolar disorder – acute treatment | III | N/A | 2006 | ||||||
| Lamictal XR | sodium channel inhibitor | neuropathic pain (epilepsy, NDA only) once daily | III | 2006 | 2006 | ||||||
| Lamictal XR | sodium channel inhibitor | schizophrenia | III | 2007 | |||||||
| Requip CR† | non-ergot dopamine agonist | Parkinson’s disease – once daily controlled release | III | 2005 | 2005 | ||||||
| formulation | |||||||||||
| Trexima | 5HT1 agonist + naproxen | migraine – fixed dose combination | III | N/A | 2005 | ||||||
| Wellbutrin XL† | noradrenaline/dopamine re-uptake inhibitor | seasonal affective disorder | Submitted | S:Dec04 | |||||||
| Requip | non-ergot dopamine agonist | RLS | Approved | A:Jun04 | A:Dec03 | ||||||
| Wellbutrin XL† | noradrenaline/dopamine re-uptake inhibitor | depression | Approved | 2006 | A:Aug03 | ||||||
| Oncology | |||||||||||
| 743921† | kinesin spindle protein (KSP) inhibitor | cancer | I | ||||||||
| elacridar | oral bioenhancer | cancer | I | ||||||||
| 497115† | thrombopoietin agonist | thrombocytopaenia | II | 2006 | 2006 | ||||||
| 485232† | recombinant human IL18 immunomodulator | immunologically-sensitive cancers (melanoma & renal cell) | II | 2007 | 2007 | ||||||
| 679769 | NK1 antagonist | chemotherapy induced & postoperative nausea & | II | ||||||||
| vomiting (also depression & anxiety and UI) | |||||||||||
| 715992† | kinesin spindle protein (KSP) inhibitor | non small cell lung cancer & other tumours | II | ||||||||
| 786034 | vascular endothelial growth factor 2 | solid tumours | II | ||||||||
| tyrosine kinase inhibitor | |||||||||||
| vestipitant (597599) | NK1 antagonist | postoperative nausea & vomiting (also chemotherapy | II | 2006 | 2006 | ||||||
| induced nausea & vomiting) | |||||||||||
| ethynylcytidine† | selective RNA polymerase inhibitor | solid tumours | II | ||||||||
| lapatinib | ErbB-2 and EGFR dual kinase inhibitor | breast cancer (also renal, lung, bladder, gastric, | III | 2006 | 2005 | ||||||
| head & neck cancers) | |||||||||||
| Hycamtin | topo-isomerase I inhibitor | ovarian cancer first line therapy | III | 2006 | 2006 | ||||||
| Hycamtin | topo-isomerase I inhibitor | small cell lung cancer second line therapy | III | 2006 | 2006 | ||||||
| – oral formulation | |||||||||||
| nelarabine | guanine arabinoside prodrug | acute lymphoblastic leukaemia & lymphomas | III | 2005 | 2005 | ||||||
| Hycamtin | topo-isomerase I inhibitor | small cell lung cancer second line therapy | Approved | 2005 | A:Nov98 | ||||||
| • | Group turnover was £22.7 billion, up 2% at constant exchange rates compared with 2006 | |||
| • | Top ten Pharmaceutical products: | |||
| Imigran/Imitrex£685 million, up 3% | ||||
| Vaccines products £1,993 million, up 20% | Flixotide/Flovent£621 million, down 1% | |||
| Avandiaproducts £1,219 million, down 22% | Coreg£587 million, down 18% | |||
| Lamictal£1,097 million, up 18% | Seroxat/Paxil£553 million, down 6% | |||
| Valtrex£934 million, up 18% | Augmentin£530 million, down 6% | |||
| • | Other key pharmaceutical growth drivers,Arixtra,Avodart,BonivaandRequipdelivered combined sales of | |||
| • | Top five Consumer Healthcare products: | |||
| Lucozade£347 million, up 16% | Panadol£262 million, up 14% | |||
| Aquafresh£308 million, up 12% | Horlicks£174 million, up 12% | |||
| Sensodyne£293 million, up 16% | ||||
| • | The launch ofalli | |||
| • | Business performance operating margin improved by 1.3 percentage points to 34.9% of turnover | |||
| • | In February 2008, GSK had157 pharmaceutical and vaccine projects in clinical development, compared with 158 in February 2007 | |||
| • | 34 major product opportunities were in phase III development or registration, including: | |||
| elesclomol (metastatic melanoma) | Promacta(thrombocytopenia) | |||
| Entereg(post-operative ileus) | Rezonic(chemotherapy-induced nausea and vomiting) | |||
| H5N1 (pandemic flu vaccine) | Synflorix(S. pneumonia and non-typeable Haemophilus influenzae) | |||
| ofatumumab (rheumatoid arthritis) | Tykerb + Armala(inflammatory breast cancer) | |||
| • | Late stage projects terminated included odiparcil for prevention of blood clots | |||
| More details on page 14. | ||||
| • | The Group carries out a global leadership survey of over 10,000 managers every two years | |||
| • | The last survey in 2006 showed a strong commitment to performance with integrity | |||
| • | Management has been working since then on addressing the areas for improvement | |||
| • | The Group is committed to encouraging diversity amongst its employees and in 2007 37% of the global management population was female (2006 – 36%) | |||
| More details on page 22. | ||||
| • | Global community investment was valued at £282 million, 3.8% of total profit before tax | |||
| • | The lymphatic filariasis elimination programme continued with another 150 million albendazole treatments donated, making almost 750 million treatments in total | |||
| • | GSK shipped 13 millionCombivirtablets and nearly 72 millionEpivirtablets to developing countries at not-for-profit prices. Approximately 183 million tablets were supplied by generic manufacturers licensed by GSK | |||
| • | Other international humanitarian product donations totalled £16 million | More details on page 23. | ||
| • | Business performance EPS was 99.1p, up 10% CER | |||
| • | Total EPS was 94.4p, up 5% CER | |||
| • | Dividend declared for 2007 of 53p, up 10% | |||
| • | A new share buy-back programme of £12 billion over two years was announced in July, of which £2.5 billion was spent in 2007 and a further £6 billion is expected in 2008 | |||
| Estimated filing dates | |||||||||||
| Compound/Product | Type | Indication | Phase | MAA | NDA | ||||||
| Respiratory | |||||||||||
| 159802† | long acting beta2 agonist | asthma & chronic obstructive pulmonary disease (COPD) | I | ||||||||
| 642444† | long acting beta2 agonist | asthma & COPD | I | ||||||||
| 656933 | IL8 antagonist | COPD | I | ||||||||
| 681323 | p38 kinase inhibitor (oral) | COPD (also rheumatoid arthritis & atherosclerosis) | I | ||||||||
| 856553 | p38 kinase inhibitor (oral) | COPD (also rheumatoid arthritis) | I | ||||||||
| 159797† | long acting beta2 agonist | COPD, also COPD & asthma in combination with | II | ||||||||
| a glucocorticoid agonist | |||||||||||
| 202405 | muscarinic antagonist | COPD | II | ||||||||
| 274150 | selective iNOS inhibitor (oral) | asthma, (also migraine & rheumatoid arthritis) | II | ||||||||
| 597901† | long acting beta2 agonist | COPD, also COPD & asthma in combination with | II | ||||||||
| a glucocorticoid agonist | |||||||||||
| 678007† | long acting beta2 agonist | COPD, also COPD & asthma in combination with | II | ||||||||
| a glucocorticoid agonist | |||||||||||
| 685698 | glucocorticoid agonist | asthma & COPD in combination with a long acting | II | ||||||||
| beta2 agonist (also allergic rhinitis) | |||||||||||
| 766994 | chemokine 3 (CCR3) antagonist (oral) | asthma & allergic rhinitis | ll | ||||||||
| 799943 | glucocorticoid agonist | asthma & COPD in combination with a long acting | II | ||||||||
| beta2 agonist | |||||||||||
| 842470† | PDE IV inhibitor (inhaled) | COPD | II | ||||||||
| mepolizumab | anti-IL5 monoclonal antibody | asthma (also hypereosinophillic syndrome and | II | ||||||||
| eosinophilic esophagitis) | |||||||||||
| Avamys/Allermist (685698) | glucocorticoid agonist | allergic rhinitis | III | 2006 | 2006 | ||||||
| Seretide/Advair | beta2 agonist/inhaled corticosteroid | COPD – mortality claim | III | 2006 | 2006 | ||||||
| Seretide | beta2 agonist/inhaled corticosteroid | asthma – initial maintenance therapy | Submitted | S:Aug04 | N/A | ||||||
| Serevent | beta2 agonist | asthma & COPD – non-CFC inhaler | Submitted | S:Apr04 | N/A | ||||||
| Ariflo | PDE IV inhibitor (oral) | COPD | Approvable | AL:Oct03 | |||||||
| Seretide/Advair | beta2 agonist/inhaled corticosteroid | asthma – non-CFC inhaler | Approved | A:Jun00 | AL:Oct01 | ||||||
| & Oct02 | |||||||||||
| Hepatitis Vaccines | |||||||||||
| Hepatitis E | recombinant | hepatitis E prophylaxis | II | ||||||||
| Fendrix Extra Strength | recombinant | extra strength hepatitis B prophylaxis (pre-haemodialysis | Approved | A:Nov04 | A:Feb05 | ||||||
| Hepatitis B | and haemodialysis patients) | ||||||||||
| Paediatric Vaccines | |||||||||||
| Rotarix | live attenuated – oral | rotavirus prophylaxis | lll | 2005 | |||||||
| Streptorix | conjugated | S. pneumoniae disease prophylaxis for children | III | 2007 | 2007 | ||||||
| N. meningitidis | conjugated | meningitis prophylaxis | Submitted | S:2005 | |||||||
| combinations | |||||||||||
| Priorix-Tetra | live attenuated | measles, mumps, rubella and varicella prophylaxis | Submitted | S:Apr04 | |||||||
| Other Vaccines | |||||||||||
| HIV | recombinant | HIV prophylaxis | I | ||||||||
| flu improved | subunit | influenza prophylaxis | I | ||||||||
| S. pneumoniae elderly | recombinant | S. pneumoniae disease prophylaxis | I | ||||||||
| Varicella Zoster | recombinant | Varicella Zoster prevention | I | ||||||||
| Dengue fever | attenuated tetravalent vaccine | prophylactic use | Il | ||||||||
| Epstein-Barr virus | recombinant | EBV prophylaxis | II | ||||||||
| Mosquirix | recombinant | malaria prophylaxis | II | ||||||||
| Staphylococcal antibodies† | monoclonal antibody | prevention of staphylococcal infections | II | ||||||||
| Cervarix | recombinant | prophylaxis of human papillomavirus (HPV) infections | IIl | 2006 | |||||||
| Simplirix | recombinant | genital herpes prophylaxis | III | ||||||||
| Boostrix | subunit | adolescent/adult booster for diphtheria, tetanus and pertussis | Approved | A:Oct00 | S:Jun04 | ||||||
| Pharmaccines | |||||||||||
| breast cancer therapeutic | recombinant | treatment of breast cancer | I | ||||||||
| (Her 2 Neu) | |||||||||||
| P501 | recombinant | treatment of prostate cancer | l | ||||||||
| mage 3 (249553) | recombinant | treatment of lung cancer/melanoma | II | ||||||||
| GSK Annual Report 2007 | 11 |
| Financial trends and ratios | |
| Financial trends and ratios | |
| Total results | 2007 | Growth | * | 2006 | Growth | * | 2005 | |||||||
| £m | CER% | £% | £m | CER% | £% | £m | ||||||||
| Turnover – Pharmaceuticals | 19,233 | – | (4 | ) | 20,078 | 9 | 8 | 18,661 | ||||||
| – Consumer Healthcare | 3,483 | 14 | 11 | 3,147 | 6 | 5 | 2,999 | |||||||
| Total turnover | 22,716 | 2 | (2 | ) | 23,225 | 9 | 7 | 21,660 | ||||||
| Cost of sales | (5,317 | ) | 8 | 6 | (5,010 | ) | 6 | 5 | (4,764 | ) | ||||
| Selling, general and administration | (6,954 | ) | – | (4 | ) | (7,257 | ) | – | – | (7,250 | ) | |||
| Research and development | (3,327 | ) | (1 | ) | (4 | ) | (3,457 | ) | 11 | 10 | (3,136 | ) | ||
| Other operating income | 475 | 307 | 364 | |||||||||||
| Operating profit | 7,593 | 3 | (3 | ) | 7,808 | 17 | 14 | 6,874 | ||||||
| Profit before taxation | 7,452 | 2 | (4 | ) | 7,799 | 19 | 16 | 6,732 | ||||||
| Profit after taxation for the year | 5,310 | 3 | (3 | ) | 5,498 | 17 | 14 | 4,816 | ||||||
| Profit attributable to minority interests | 96 | 109 | 127 | |||||||||||
| Profit attributable to shareholders | 5,214 | 5,389 | 4,689 | |||||||||||
| Basic earnings per share (pence) | 94.4 | p | 5 | (1 | ) | 95.5 | p | 19 | 16 | 82.6 | p | |||
| Diluted earnings per share (pence) | 93.7 | p | 94.5 | p | 82.0 | p | ||||||||
| Business performance results | ||||||||||||||
| Turnover | 22,716 | 2 | (2 | ) | 23,225 | 9 | 7 | 21,660 | ||||||
| Cost of sales | (5,206 | ) | 6 | 4 | (5,010 | ) | 6 | 5 | (4,764 | ) | ||||
| Selling, general and administration | (6,817 | ) | (2 | ) | (6 | ) | (7,257 | ) | – | – | (7,250 | ) | ||
| Research and development | (3,237 | ) | (3 | ) | (6 | ) | (3,457 | ) | 11 | 10 | (3,136 | ) | ||
| Other operating income | 475 | 307 | 364 | |||||||||||
| Operating profit | 7,931 | 8 | 2 | 7,808 | 17 | 14 | 6,874 | |||||||
| Profit before taxation | 7,790 | 6 | – | 7,799 | 19 | 16 | 6,732 | |||||||
| Profit after taxation for the year | 5,571 | 8 | 1 | 5,498 | 17 | 14 | 4,816 | |||||||
| Profit attributable to minority interests | 96 | 109 | 127 | |||||||||||
| Profit attributable to shareholders | 5,475 | 5,389 | 4,689 | |||||||||||
| Basic earnings per share (pence) | 99.1 | p | 10 | 4 | 95.5 | p | 19 | 16 | 82.6 | p | ||||
| Diluted earnings per share (pence) | 98.3 | p | 94.5 | p | 82.0 | p | ||||||||
| Research and development – total | ||||||||||||||
| Pharmaceuticals | 3,219 | 3,353 | 3,030 | |||||||||||
| Consumer Healthcare | 108 | 104 | 106 | |||||||||||
| Total | 3,327 | 3,457 | 3,136 | |||||||||||
| Net finance cost cover | ||||||||||||||
| Net finance costs | 191 | 65 | 194 | |||||||||||
| Cover | 40 times | 121 times | 36 times | |||||||||||
| Net finance cost cover is profit before tax plus net finance costs, divided by net finance costs. | ||||||||||||||
| Tax rate – total | 28.7% | 29.5% | 28.5% | |||||||||||
| Tax rate – business performance | 28.5% | 29.5% | 28.5% | |||||||||||
| Borrowings | ||||||||||||||
| Net debt | 6,039 | 2,450 | 1,237 | |||||||||||
| Gearing | 61% | 25% | 16% | |||||||||||
| The gearing ratio is calculated as net debt as a percentage of total equity. | ||||||||||||||
| * CER% represents growth at constant exchange rates. Sterling% or £% represents growth at actual exchange rates. See page 9. |
| The calculation of business performance, a supplemental non-IFRS measure, is described in Note 1 to the financial statements, ‘Presentation of the financial statements’. |
| 12 | GSK Annual Report 2007 |
| Optimising the performance of key products | |
| Business review | |
| GSK undertakes a range of activities to maximise the commercial potential of its intellectual property by introducing innovative products, accelerating the process of bringing them to as many markets as possible, increasing brand recognition and improving access to new medicines. | ||
Achieve commercial and operational excellence
GlaxoSmithKline undertakes a range of activities to maximise the commercial potential of its intellectual property, by introducing innovative products into as many markets as possible, accelerating the process to bring new products to market, increasing brand recognition and ensuring that patients have access to new medicines. Both theWorldwide pharmaceutical and consumer healthcare businesses focus on ways to improve existing performance through commercial and operational excellence initiatives.
Worldwide sales force excellenceGlaxoSmithKlineGSK’s sales force has always ranked high onin surveys with healthcare professionals. Worldwide sales force excellenceSales Force Excellence (WSFE) aims to improve customer satisfaction even further.
The time available for physicians to learn about new medicines and clinical studies is precious. Through the WSFE initiative, sales representatives strengthen product knowledge and learn to deliver patient-specific treatment options more efficiently and more effectively. Research shows that a sales visit is highly effective when a representative engages the physician in dialogue around patient types and supports the message with visual aids that illustrate clinical results.
In 2004, the Group introduced aA single global sales call model has been introduced that focuses on treating the patient through a dialogue about ”when““when” a GlaxoSmithKlineGSK medicine is appropriate, “why” it is effective and “how” to administer it safely. By the end of the year, allAll field peoplestaff in the Group’sGSK’s key markets hadhave been trained in thethis new “When? Why? How?” approach.
The entire sales organisation is immersedinvolved in WSFE to bring about a cultural change that raises ethical standards and helps build long-term, trusting relationships with the healthcare community. In addition, a dashboard of key performance indicators, a product knowledge certification process and an effective leadership training programme have been established.
Superior product knowledge is essential in serving the needs of healthcare professionals. Physicians rely on GSK to keep them abreast of changes in prescribing information or new clinical studies involving GSK medicines. As a key goal of WSFE, GSK expanded its Annual Certification program to all countries. Over 30,000 representatives passed certification tests on the pathology, prescribing information and key messages of their leading products. Scores were consistently around 98%, with many representatives achieving a perfect score.
MarketingPharmaceutical marketing excellenceGoalsLarge numbers of patients suffering the global Marketing excellence initiative are first,effects of disease continue to help undiagnosed patients seek a physician’s helpbe unable to benefit from innovative medicines and second, to ensure they receive appropriate treatment.treatments. For example in the UK, officials estimate that 2.4 million people sufferwithin Europe, around 50% of patients suffering from type 2 diabetes, yet about 25 per cent of them remain undiagnosed,Chronic Obstructive Pulmonary Disease (COPD) are diagnosed and of those, diagnosed, another 25 per cent remain untreated. Of those treated, a significant number is under-treated in some way – that is, these patients do not achieve the level of health that the treatments could provide under optimal circumstances. GlaxoSmithKline’sonly 80% receive regular maintenance drug therapy.
GSK’s marketing initiative implements programmes to overcome the barriers to proper diagnosis and treatment. Astreatment, by providing accurate and balanced information on its products, to allow as many people as possible to benefit from GSK’s medical advances. While these programmes beginare beginning to show effects, more needs to be done before the societal costs of disease will decrease. To the extent that a GlaxoSmithKline product is chosen for patients’ treatment, the Group will benefit as well.
Marketing codes
GlaxoSmithKline has been recognised by the industry for its excellence in marketing and has received a variety of awards acknowledging the success of its campaigns. Each award programme is independently judged by experts.
GlaxoSmithKlineGSK is committed to marketing that is ethical, responsible and patient-centred. There is a corporatepatient-centred marketing. The Group’s Pharmaceutical Marketing and Promotional Activity policy governinggoverns marketing activities thatand applies to all employees, suppliers, contractors and agents. This policy requires that all marketing and promotional activities are based on valid scientific evidence and comply with applicable laws and regulations. Each business sector has policies that include additional requirements
This policy is supported by regional marketing practices codes in Europe, GSK’s International region, Japan and guidance.
GlaxoSmithKline also complies with relevantthe USA. These codes apply the same ethical standards but reflect differences in market structures, national healthcare systems and regulations. They incorporate the principles of industry codes of practice. Training is providedpractice such as the European Federation of Pharmaceutical Industries Associations, the International Federation of Pharmaceutical Manufacturers Associations, Japan Pharmaceutical Manufacturers Association and Pharmaceutical Research and Manufacturers of America marketing codes.
Next Generation Now
The US pharmaceutical businesses have created and implemented the Next Generation Now operating model for all employees whose position requires an understandingadvertising agencies. Design of Group marketing requirements, particularly sales representatives. There isthis model, which aims to improve creativity and productivity and achieve significant cost savings, involved a monitoring processnumber of key areas. As a result professional brand accounts were consolidated under a single agency, which increased access to the best talent, streamlined account management and reduced rates. The team also instituted key changes for marketing activities which includes Group internal audit and independentagency reviews and approvals.created financial parameters and resource guides to improve decision making and processes.
Patient advocacyHealth literacy
To help patients understand basic information about their disease and treatment options, US pharma launched a Health literacy programme. Over 1,000 employees and agency staff have gone through training to learn how to improve the materials, with a goal of helping patients learn more about their disease and how to manage it. The Patient advocacy initiativeresult is obvious improvements to patient-directed materials by making them easier to read, trimming content, incorporating more user-friendly design and including step-by-step instructions on health behaviours. Health literacy is gaining ground in other parts of GSK as colleagues begin adopting the concepts of simpler, clearer patient communication.
Consumer Healthcare marketing excellence
Teams comprising marketing and R&D are dedicated to each of seven global brands and focused on delivering pipelines and global marketing programmes for in-country commercial teams to execute. These efforts are driving significant sales growth in many markets. For other large brands that have one dominant market, but may be available in several territories, a dedicated team drives each of these lead market brands for their dominant market. The remaining assets, termed enterprise brands, are locally managed by in-market commercial teams to retain their entrepreneurial spirit and local relevance.
| GSK Annual Report 2007 | 13 |
| REPORT OF THE DIRECTORS | |
| Delivering the product pipeline for patients | |
| Business review | |
| Delivering the product pipeline for patients | |
| GSK spent over £3.2 billion on R&D in 2007 and employs over 16,000 staff in R&D. The number of major product opportunities in phase III or registration has increased each year since 2000 and now stands at 34. | ||
Research and development – Pharmaceuticals
GSK R&D has demonstrated significant progress since its inception in 2002. The rationale fordeveloped one of the strategy centres on both enhancing access for the Group’smost robust pipelines of potential new medicines in markets where publicthe industry. In 2007, Pharmaceutical R&D was actively managing over 150 projects in human clinical trials across the globe. Delivering this pipeline to patients safely and private payers influence availability as well as improvingefficiently is the reputation as a patient-centric group.number one goal.
Focus on the patient
One objective unites the 15,000 people who work at GSK Pharmaceutical R&D, and that is staying focused on the patient. It drives them to discover potential treatments for disease and to develop innovative medicines that offer true benefit to patients. Reaching out to and speaking with patients and their families to understand the impact of disease on their lives, their work and their community are an essential part of this. GSK knows patients are waiting, and the focus on the patient is the driver to deliver the best every day.
Initially launched as a US programme, it has now been expanded to be a critical initiative in strategic plans throughoutPharmaceutical R&D at GSK is organised around the world. This year’s Patient Advocacy Leaders Summit in Philadelphia was attendeddiscovery and development of medicines for patients. Discovery is conducted by over four hundred people representing twenty three countries from six continents. Additionally, Patient Advocacy teams in both the US and Europe have shared best practices and established processes to optimise interaction with patient groups.
European Centres of ExcellencePharmaceuticals Europe has introduced a new business model to enhance its ability to compete in an increasingly challenging environment. The model has establishedGSK’s Centres of Excellence for keyDrug Discovery (CEDDs), and development by GSK’s Medicine Development Centres (MDCs). Along the way, many other groups provide critical scientific input, conduct important experiments, and aid in managing the R&D process. These groups are described in more detail below.
Discovering potential medicines
Two components are needed in the discovery of new medicines – identification of the most important molecular targets that have potential to impact human disease and discovery of compounds that can modulate these targets to alleviate disease in an effective and safe way.
Molecular Discovery Research (MDR) produces the lead compounds that may interact with targets which form the basis of drug discovery efforts in GSK’s CEDDs. In 2007, MDR progressed over 220 preclinical drug discovery programmes and in so doing performed hundreds of assays per week and provided the CEDDs with over 30 leads.
When GSK R&D designed the CEDDs, it integrated groups of scientists and clinicians and organised their work around specific disease areas, with the intent to produce nimble and entrepreneurial discovery units.
GSK’s 11 CEDDs, based in Europe and the USA, are: | |
| • | Biopharmaceuticals – Stevenage, UK |
| • | Cardiovascular & Urogenital – Upper Merion, USA |
| • | Centre of Excellence for External Drug Discovery – Upper Merion, USA |
| • | Immuno-inflammation – Stevenage, UK |
| • | Infectious Disease – Upper Merion and Research Triangle Park, USA |
| • | Metabolic – Research Triangle Park, USA |
| • | Oncology – Upper Providence, USA |
| • | Macrolide Drug Discovery – Zagreb, Croatia |
| • | Neurology – Harlow, UK |
| • | Psychiatry – Verona, Italy |
| • | Respiratory – Stevenage, UK. |
Each CEDD is responsible for identifying the targets of most relevance in its therapeutic areas,area and building on the lead compounds transferred from MDR to produce a potential medicine. The fundamental steps in turning a lead compound into a medicine are optimising it for potency, efficacy and safety and defining the biology in animals and humans so that the medicine can be tested for effects in the right patient groups.
Once a candidate compound is selected, the CEDDs are responsible for undertaking the clinical studies necessary to demonstrate a beneficial effect sufficient to declare “proof of concept” – the first indication in patients that the new medicine works. Based on the programme’s profile of safety and efficacy a decision is then made on whether to progress the medicine into late-stage drug development.
As part of GSK’s commitment towards pursuing the best science anywhere in the world, the Centre of Excellence for External Drug Discovery (CEEDD) was established in 2005. The CEEDD has the same objective as the CEDDs: delivering medicines into late-stage development, but does so by establishing and managing long-term strategic collaborations with biotech and small to medium-sized pharmaceutical companies. In 2007, the CEEDD exercised its first option to bring in a compound to clinical development: XL880, an anti-cancer inhibitor from Exelixis.
As part of this same strategic intent, in 2007 GSK established a dedicated R&D centre in Shanghai. R&D in China will focus on research into neurodegeneration with the objective of creating new medicines for such severe disorders as respiratorymultiple sclerosis, Parkinson’s disease and metabolicAlzheimer’s disease. The centre will eventually direct the global discovery and development activities within its therapeutic area, from drug-target identification to late-stage clinical studies, while collaborating with research institutions elsewhere in China and other countries. Establishing R&D China reflects GSK’s commitment to ally with talented researchers wherever they are located and to further encourage within R&D the contest of ideas needed to create new medicines.
Developing medicines for business capabilities suchpatients
Progression into late-stage development (referred to at GSK as commercial excellence‘medicines development’), consists of optimising both the physical product properties of the medicine, that is, the chemical steps and portfolio management. These centres develop pan-European strategiesformulation required to manufacture and deliver it, as well as the large scale confirming studies of efficacy and safety. The former activity is the responsibility of Preclinical Development, while the latter is the responsibility of the clinical development and development operations teams. The combination of the results of these two steps into a regulatory file for submission to regulatory agencies and approval for patient use is the responsibility of the regulatory team. The integration of all steps above into a coherent project is the responsibility of the project teams, which are implemented consistently acrossgrouped therapeutically into Medicine Development Centres. These roles are described in more detail as follows:
| 14 | GSK Annual Report 2007 |
| REPORT OF THE DIRECTORS | |
| Delivering the product pipeline for patients | |
| Business review | |
| Delivering the product pipeline for patients | |
| continued | |
Preclinical Development (PCD) includes a wide range of activities throughout the region.entire medicines development process. In addition, this function is involved in the enhancement of existing products by devising more convenient formulations. Early in the development process, the metabolism and safety of compounds are evaluated in laboratory animals before testing in humans. The modeltesting required in animals is drivinghighly regulated (see Animals and research, page 16).
Processes and supporting analytical methods for drug synthesis and product formulation and delivery are scaled up to meet increasing supply requirements. This leads to the swift adoptiontechnical transfer of brand strategiesthe processes and campaigns, while reducing costs and duplication.methods to manufacturing. The new model also focuses on ensuring that new assets may be launched in Europe with the optimal data to support their approval and reimbursement.
ProcurementGlaxoSmithKline annually spends around £5 billion on non-production related third party purchases; worldwide this covers all areas including media, travel,product supply process, a partnership between R&D IT and marketing. These purchases are managed by procurement, on behalf of their internal customers and focus on delivering the best value to the Group. This approach covers assurance of supply, service, quality, cost and innovation. The process has delivered savings in excess of £200 million per year since the merger.
Improving processesThe Group has ongoing improvements in processes to increase the quality of goods and services, improve speed and reliability of performance and deliver savings. The procurement function initiates rigorous supplier selection and monitoring processes across all key areas of expenditure and compliance with the use of preferred suppliers is high. In 2004, operational excellence experts from Global Manufacturing and Supply, supportedensures that a numberrobust product is developed for large-scale commercial manufacturing and launch.
Medicines Development is the collection of six therapeutically aligned MDCs. Each MDC has ultimate accountability for developing experimental drugs into regulatory-approved medicines for patients. The MDCs are responsible for creating value through the execution of full product development plans and ensuring strong partnerships with the rest of GSK, in particular the CEDDs and the other businesseslate-stage development groups.
The MDCs are based at the major USA and UK sites and are aligned with the following therapeutic areas: | |
| • | Cardiovascular/Metabolic |
| • | Infectious Diseases including Diseases of the Developing World (DDW) |
| • | Musculoskeletal/Inflammation/Gastrointestinal/Urology |
| • | Neuroscience (Psychiatry/Neurology) |
| • | Oncology |
| • | Respiratory |
The MDCs discharge their responsibilities through project teams for each medicine in development. These project teams are responsible for maximising the worldwide development opportunities for each product within their remit and functionsto see that all the information needed to support the registration, safety programmes, pricing and formulary negotiations is available. Commercial input from Global Product Strategy and Commercial Operations ensures that regional marketing needs are integrated into development plans at an early stage.
Development Operations drives operational excellence in the execution of the project’s clinical studies. This is done by helpingestablishing integrated planning to solveensure consistent and predictable drug project plans and supplying clinical operations capabilities. In 2007, development operations managed clinical trials with over 30,000 active patients, handling everything from patient recruitment to data management to project planning.
The Office of the Chief Medical Officer is charged with the safety of patients involved in clinical trials, as well as the proper filing of the findings with regulatory authorities. All clinical trials sponsored by GSK, irrespective of where they take place, are conducted according to international standards of good clinical practice and applicable laws and regulations. The protocols are reviewed by the external regulatory agencies in the relevant countries where required and all protocols are considered by an ethics review committee, whose responsibilities cover the sites where the studies will take place.
Safety data are routinely collected throughout development programmes and are reported to national and regional regulatory agencies in line with applicable regulations.
GSK’s Chief Medical Officer, working with the Global Safety Board, is ultimately accountable for oversight of all major decisions regarding patient safety. The GSK Global Safety Board is responsible internally for approving pivotal studies and investigating any issues related to patient safety arising during the development programme. Information from GSK clinical trials is widely and easily available at the Clinical Trial Register on GSK’s website.
In-licensing
GSK continues to identify compounds from other companies that would enhance the portfolio and to create innovative collaborations to ensure that the Group is regarded as the partner of choice for large and small companies.
The subjects of acquisitions, in-licensing, co-marketing/co-promotion, or future options arrangements in 2007 included: | |
| • | Xenoport (XP13512, phase III for RLS and phase II for neuropathic pain) |
| • | Sepracor (Lunesta/Lunivia (excluding USA, Canada, Mexico and Japan), GABA-A agonist, insomnia, pending EU filing) |
| • | Synta (STA-4783, HSP70 upregulation, melanoma, sarcoma, solid tumors, phase III) |
| • | ToleRx (anti-CD3 mAb for autoimmune diseases, phase II) |
| • | Targacept (TC-2696 in phase II for acute post-operative pain and novel leads for Central nervous system diseases) |
| • | Anacor (novel candidates for viral and bacterial diseases, preclinical) |
| • | OncoMed (cancer stem cell therapeutics, preclinical) |
| • | Galapagos (novel anti-bacterials and antivirals, preclinical) |
| • | Santaris (novel antiviral agents, preclinical) |
Managing the portfolio
Key projects reaching significant milestones are reviewed each month by the Product Management Board (PMB), which is responsible for determining if a medicine has met criteria for passing into the next phase of development.
Progress of the portfolio is communicated to investors and the media at regular intervals during the year. Details of GSK’s product development pipeline are given on pages 18 to 21.
Risk in R&D
Pharmaceutical R&D, by its very nature, is an inherently risky venture. From the time a potential medicine is discovered until it becomes an approved medicine can take 10-15 years. Further, only one in ten molecules that starts human clinical trials ever reaches regulatory approval. The nine out of ten that fail can be discontinued for a variety of reasons, from insufficient safety thresholds to lack of efficacy to manufacturing hurdles. These discontinuations occur despite extensive predictive testing. Late-stage projects terminated during 2007 includedAriflo for COPD and odiparcil for stroke prevention.
| GSK Annual Report 2007 | 15 |
| REPORT OF THE DIRECTORS | |
| Delivering the product pipeline for patients | |
| Business review | |
| Delivering the product pipeline for patients | |
| continued | |
Research and development – vaccines
GSK’s vaccine division activities include research, clinical development, regulatory strategy, commercial strategy, scaling up, vaccine production, packaging and all other support functions. The discovery and development of a new vaccine is a complex process requiring long-term investment. In R&D over 1,500 scientists are devoted to developing new vaccines and more cost-effective and convenient combination vaccines to prevent infections that cause serious medical problems worldwide. GSK’s vaccine division is also developing therapeutic immunotherapeutics aimed at educating the patient’s immune system to identify and attack cancer cells in a rigorous, controlledhighly specific manner. Thanks to the use of innovative technologies and structured wayits global business model, GSK is a fast-growing vaccine maker, delivering value by contributing to the health and well-being of people in every generation around the world.
Vaccine discovery involves many collaborations with academia and the biotech industry to identify new vaccine antigens which are then expressed in yeast, bacteria or mammalian cells and purified to a very high level.
This is followed by formulation of the clinical lots of the vaccine. This may involve mixing antigens with selected GSK novel proprietary adjuvant systems, which are combinations of selected adjuvants designed to enhance the immune response. The first step is to evaluate the safety and efficacy of the candidate vaccine in a preclinical setting, usually involving an animal model. The candidate vaccine is then tested in clinical trials in healthy individuals to evaluate safety and effectiveness in inducing an immune response to protect the body from infection encountered later in a natural setting (phase I/II). Large-scale field trials in healthy individuals follow to establish safety and efficacy in a cross section of the population (phase III).
The results obtained during clinical trials and data regarding the development of a quality and large-scale production process and facilities are then combined into a regulatory file which is submitted to the authorities in the countries where the vaccine will be made available.
After launch, post marketing studies of considerable size are set up to assess vaccination programmes and to focus efficientlymonitor vaccine safety (phase IV).
Vaccine manufacturing is particularly complex as it requires the use of innovative technologies and living micro-organisms. Sophisticated quality assurance and quality control procedures are in place to ensure both quality and safety of the vaccines and this commonly includes animal use according to health authorities’ requirements. Due to their biological nature, individual health authorities may subject vaccines to a second control to guarantee the highest quality standards.
GSK has been increasing its capacity to supply vaccines by developing its global manufacturing network (see page 26, 'Global manufacturing and supply').
Diseases of the developing world
Continued investment in research into diseases that disproportionately affect the developing world is essential if there is to be a long-term improvement in the health of people who live in these regions. As part of GSK’s response to this challenge, it operates a drug discovery unit, based at Tres Cantos (Spain), primarily dedicated to finding new medicines for malaria and tuberculosis. Additional research sites in the USA and the UK are focused on those activities adding the greatest valuediscovering new medicines to GlaxoSmithKline.treat HIV/AIDS and drug resistant bacteria, while vaccine research is conducted in Rixensart (Belgium).
Project FutureIn 2003, Project Future,Medicines and vaccines that enter clinical trials are taken through development and regulatory processes by dedicated groups based in the UK, USA and Belgium. Through these R&D efforts, GSK is addressing the prevention and treatment of all three of the World Health Organization’s (WHO) priority infectious diseases. Recently, GSK has developed scored-tablets for its key anti-retroviral products to simplify the treatment of children living with HIV.
GSK currently has 12 clinical programmes of relevance to the developing world, seven of which are aimed at producing vaccines and medicines for diseases that disproportionately affect developing countries.
Public/Private Partnerships (PPPs) remain essential to fund research where there is no commercially viable market for a fundamentalpotential product. GSK is a leader in working in PPPs and continues to collaborate closely with many governments, academic centres, United Nations’ agencies and other global funding bodies in this area, to maximise expertise and knowledge. This has the dual benefit of encouraging research and development and accelerating access to the medicines in the developing world.
Animals and research
For ethical, regulatory and scientific reasons, research using animals remains a small but vital part of research and development of new medicines and vaccines. GSK only uses animals where there is no alternative and only in the numbers required for each test. The Group strives to exceed regulatory standards in the care and use of the animals it uses and undergoes internal and external review to assure these standards.
The vast majority of the experimental methods do not use animals. GSK is actively engaged in research to develop and validate more tests that either avoid the use of animals in research or reduce the numbers needed. When animals are used in research unnecessary pain or suffering is scrupulously avoided.
GSK understands that use of animals for research purposes commands a high level of public interest. The GlaxoSmithKline Public Policy Position ‘The care and ethical use of animals in research’, and further information and reports, are available on GSK’s website or from Secretariat.
| 16 | GSK Annual Report 2007 |
| REPORT OF THE DIRECTORS | |
| Delivering the product pipeline for patients | |
| Business review | |
| Delivering the product pipeline for patients | |
| continued | |
Research and development – Consumer Healthcare
The focus of R&D is to identify and develop novel products that benefit consumers in the over-the-counter (OTC), oral healthcare and nutritional healthcare markets. To achieve a significant increase in innovation from internal and external sources, R&D has been remodelled to deliver a more valuable pipeline of products. With this change, specific tasks that can be performed at lower cost outside GSK have been transferred to external development partners. This transfer, along with other headcount reductions and savings, releases substantial funds for investment in additional innovation projects. The remodelling builds on the Consumer Healthcare businessoperating model to increase competitivenesswhereby, for the Global brands, R&D mirrors the commercial structure, with brand-dedicated R&D teams paired with commercial brand teams and thereby, sales growth was undertaken. This model was implementedboth located together at the Innovation Centres at Weybridge, UK or Parsippany, USA.
GSK’s pipeline
At the beginning of February 2008, GSK had nearly 210 pharmaceutical and vaccine projects in 2004. Furtherdevelopment. Of these, 157 are in the clinic comprising 96 NCEs, 37 PLEs and 24 vaccines, compared with 123 in 2001.
In the last 12 months, GSK commenced 9 new phase III clinical development programmes (including 2 vaccines) and now has 34 key assets in phase III/registration.
Compounds in phase III/registration
GSK has maintained momentum in delivering its late-stage pipeline, receiving 10 product approvals and filing 10 product applications in 2007. Currently it has 13 new product opportunities filed with regulators.
| Development programmes progressed into phase III in 2007: | |
| • | belimumab (LymphoStat B) |
| • | elesclomol |
| • | GSK 1838262 (XP13512) |
| • | MAGE-A3 therapeutic vaccine |
| • | MenACWY vaccine |
| • | ofatumumab (RA) |
| • | Promacta(Hep C) |
| • | Tykerb+Armala(IBC) |
| • | Tykerb(Head & Neck) |
| Products filed: | |
| • | Avodart& alpha blocker co-prescription |
| • | Cervarix(USA & Japan) |
| • | EnteregPOI |
| • | H5N1 vaccine (EU) |
| • | Kinrix(USA) |
| • | Lamictal XR(USA) |
| • | Lunivia(EU) |
| • | Promacta(USA) |
| • | Requip XL(USA) |
| • | Rotarix(USA) |
| • | Synflorix(EU & International) |
| • | Treximet |
| • | Volibris(EU) |
GSK expects a sustained flow of new products in the next two years. For further details are givenof these developments, and information on other important launches/filings see GSK outlook on page 23.50.
The content of the drug development portfolio will change over time as new compounds progress from discovery to development and from development to the market. Owing to the nature of the drug development process, many of these compounds, especially those in early stages of investigation, may be terminated as they progress through development. Phase I NCEs with multiple indications are counted only once. NCEs in later phases are counted by each indication. For competitive reasons, new projects in pre-clinical development have not been disclosed and some project types may not have been identified.
GSK’s policy is to seek to obtain patent protection on all protectable inventions discovered or developed through its R&D activities. Patent protection for new active ingredients is available in all significant markets and protection can also be obtained, for example, on new pharmaceutical formulations, manufacturing processes, medical uses and special devices for administering products, see page 28 ‘Intellectual property’.
| GSK Annual Report 2007 | 17 |
| REPORT OF THE DIRECTORS | |
| Delivering the product pipeline for patients | |
| Business review | |
| Delivering the product pipeline for patients | |
| continued | |
| Key | |
| † | In-license or other alliance relationship with third party |
| S | Date of first submission |
| A | Date of first regulatory approval (for MAA, this is the first EU approval letter) |
| AL | Date Approvable or Complete Response Letter received – indicates that ultimately approval can be given subject to resolution of outstanding queries |
| BLA | Biological License Application |
| MAA | Marketing authorisation application (Europe) |
| NDA | New drug application (USA) |
| Phase I | Evaluation of clinical pharmacology, usually conducted in volunteers |
| Phase II | Determination of dose and initial evaluation of efficacy, conducted in a small number of patients |
| Phase III | Large comparative study (compound versus placebo and/or establishedtreatment) in patients to establish clinical benefit and safety. |
Estimated submission dates are only disclosed where they are within 12 months of the date of the chart. This date represents the most likely year of submission where it is considered that there is a reasonably high probability of successfully meeting the date assuming the clinical data meets the expected end-points of the clinical trials.
| Estimated | |||||||||
| submission | dates | ||||||||
| Compound | Type | Indication | Phase | MAA | NDA | ||||
| Cardiovascular & Metabolic | |||||||||
| Cardiovascular projects | |||||||||
| 256073 | high affinity nicotinic acid receptor | dyslipidaemia | I | ||||||
| (HM74A) agonist | |||||||||
| rilapladib† | Lp-PLA2 inhibitor | atherosclerosis | I | ||||||
| 681323 | p38 kinase inhibitor | atherosclerosis (also chronic obstructive pulmonary | II | ||||||
| disease – COPD, neuropathic pain & rheumatoid arthritis) | |||||||||
| 856553 | p38 kinase inhibitor | atherosclerosis (also COPD, depression & rheumatoid arthritis) | II | ||||||
| darapladib† | Lp-PLA2 inhibitor | atherosclerosis | ll/III | ||||||
| Coreg CR†+ ACE inhibitor | beta blocker + angiotensin converting enzyme inhibitor | hypertension – fixed dose combination | III | N/A | 2008 | ||||
| Volibris† | endothelin A antagonist | pulmonary arterial hypertension | Submitted | S:Mar07 | N/A | ||||
| Arixtra | synthetic factor Xa inhibitor | treatment of acute coronary syndrome | Approved | A:Aug07 | AL:Feb07 | ||||
| & Sep07 | |||||||||
| Metabolic projects | |||||||||
| remoglifozin etabonate | sodium dependent glucose transport (SGLT2) | obesity | I | ||||||
| (189075)† | inhibitor | ||||||||
| 376501 | PPAR gamma partial agonist | type 2 diabetes | I | ||||||
| 756050 | bile acid receptor agonist | type 2 diabetes | I | ||||||
| otelixizumab (TRX4)† | anti-CD3 monoclonal antibody | type 1 diabetes | II | ||||||
| remoglifozin etabonate | SGLT2 inhibitor | type 2 diabetes | II | ||||||
| (189075)† | |||||||||
| Syncria† | glucagon-like peptide 1 agonist | type 2 diabetes | II | ||||||
| Avandamet XR | PPAR gamma agonist + metformin | type 2 diabetes – extended release | III | N/A | |||||
| Avandia | PPAR gamma agonist | atherosclerosis in type 2 diabetes | III | ||||||
| Avandia+ simvastatin | PPAR gamma agonist + statin | type 2 diabetes | III | N/A | |||||
| Avandia | PPAR gamma agonist | prevention of disease progression | Submitted | S:Feb07 | |||||
| Infectious Diseases | |||||||||
| 580416 | ribosome inhibitor | treatment of bacterial infections | I | ||||||
| 945237 | topoisomerase ll inhibitor | treatment of bacterial infections | I | ||||||
| 1349572† | HIV integrase inhibitor | HIV infections | I | ||||||
| farglitazar | PPAR gamma agonist | hepatic fibrosis | II | ||||||
| sitamaquine | 8-aminoquinoline | treatment of visceral leishmaniasis | II | N/A | |||||
| tafenoquine† | 8-aminoquinoline | Plasmodium vivaxmalaria | II | ||||||
| 18 | GSK Annual Report 2007 |
| REPORT OF THE DIRECTORS | |
| Delivering the product pipeline for patients | |
| Business review | |
| Delivering the product pipeline for patients | |
| continued | |
| Estimated | ||||||||
| submission | dates | |||||||
| Compound | Type | Indication | Phase | MAA | NDA | |||
| Musculoskeletal, Inflammation, Gastrointestinal & Urology | ||||||||
| 315234 | monoclonal antibody | rheumatoid arthritis | I | |||||
| 768974† | parathyroid hormone agonist | osteoporosis | I | |||||
| 962040 | motilin receptor agonist | delayed gastric emptying | I | |||||
| 971086 | androgen modulator | sarcopaenia | I | |||||
| 1827771 | interleukin 1 antagonist | rheumatoid arthritis | I | |||||
| belimumab† | anti-B lymphocyte stimulator monoclonal antibody (s.c.) | systemic lupus erythematosus | I | |||||
| pazopanib | multi-kinase angiogenesis inhibitor | age-related macular degeneration (also cancer indications) | I | |||||
| 221149 | oxytocin antagonist | threatened pre-term labour | II | |||||
| 232802 | 3G-selective oestrogen receptor modulator | treatment of menopausal symptoms | II | |||||
| 274150 | selective iNOS inhibitor | rheumatoid arthritis | II | |||||
| 681323 | p38 kinase inhibitor (oral) | rheumatoid arthritis (also atherosclerosis, COPD & neuropathic pain) | II | |||||
| 856553 | p38 kinase inhibitor (oral) | rheumatoid arthritis (also atherosclerosis, COPD & depression) | II | |||||
| 876008† | corticotrophin releasing factor (CRF1) antagonist | irritable bowel syndrome (also depression & anxiety) | II | |||||
| ronacaleret† | calcium antagonist | osteoporosis & fracture healing | II | |||||
| solabegron | beta3 adrenergic agonist | irritable bowel syndrome | II | |||||
| solabegron | beta3 adrenergic agonist | overactive bladder | II | |||||
| Avodart | 5-alpha reductase inhibitor | reduction in the risk of prostate cancer | III | |||||
| Avodart+ alpha blocker | 5-alpha reductase inhibitor + alpha blocker | benign prostatic hyperplasia – fixed dose combination | III | 2008 | 2009 | |||
| belimumab† | anti-B lymphocycte stimulator monoclonal antibody (i.v.) | systemic lupus erythematosus | III | |||||
| Bosatria(mepolizumab) | anti-IL5 monoclonal antibody | hypereosinophilic syndrome (also severe asthma & nasal polyposis) | III | 2008 | 2008 | |||
| Entrareg/Entereg† | peripheral mu-opioid antagonist | opioid-induced bowel dysfunction | III | |||||
| ofatumumab† | anti-CD20 human monoclonal antibody | rheumatoid arthritis (also cancer indications) | III | |||||
| Entrareg/Entereg† | peripheral mu-opioid antagonist | post operative ileus | Approvable | AL:Jul05 & | ||||
| AL:Nov06 | ||||||||
| Neurosciences | ||||||||
| 163090 | 5HT1 antagonist | depression & anxiety | I | |||||
| 239512 | histamine H3 antagonist | dementia | I | |||||
| 249320 | monoclonal antibody | neuronal injury | I | |||||
| 424887 | NK1 antagonist/SSRI | depression & anxiety | I | |||||
| 561679† | CRF1 antagonist | depression & anxiety | I | |||||
| 586529† | CRF1 antagonist | depression & anxiety | I | |||||
| 598809 | dopamine D3 antagonist | drug dependency | I | |||||
| 618334 | dopamine D3 antagonist | drug dependency | I | |||||
| 729327 | AMPA receptor modulator | schizophrenia | I | |||||
| 933776 | monoclonal antibody | Alzheimer’s disease | I | |||||
| 1014802 | sodium channel inhibitor | bipolar disorder | I | |||||
| 1018921 | type 1 glycine transport inhibitor | schizophrenia | I | |||||
| orvepitant | NK1 antagonist | depression & anxiety | I | |||||
| 189254 | histamine H3 antagonist | narcolepsy | II | |||||
| 372475† | triple (5HT/noradrenaline/dopamine) re-uptake inhibitor | depression | II | |||||
| 468816 | glycine antagonist | smoking cessation | II | |||||
| 649868† | orexin antagonist | sleep disorders | II | |||||
| 681323 | p38 kinase inhibitor | neuropathic pain (also atherosclerosis, COPD & rheumatoid arthritis) | II | |||||
| 742457 | 5HT6 antagonist | dementia | II | |||||
| 773812 | mixed 5HT/dopaminergic antagonist | schizophrenia | II | |||||
| 842166 | non-cannabinoid CB2 agonist | inflammatory pain | II | |||||
| 856553 | p38 kinase inhibitor | depression (also atherosclerosis, COPD & rheumatoid arthritis) | II | |||||
| 876008† | CRF1 antagonist | depression & anxiety (also irritable bowel syndrome) | II | |||||
| 1838262 (XP13512)† | voltage-gated calcium channel modulator | migraine prophylaxis | II | |||||
| 1838262 (XP13512)† | voltage-gated calcium channel modulator | neuropathic pain | II | |||||
| casopitant | NK1 antagonist | depression & anxiety (also asZunrisa/Rezonicfor chemo- | II | |||||
| therapy induced & postoperative nausea & vomiting) | ||||||||
| firategrast† | dual alpha4 integrin antagonist (VLA4) | multiple sclerosis | II | |||||
| 1838262 (XP13512)† | voltage-gated calcium channel modulator | restless legs syndrome | III | 2008 | ||||
| Lamictal XR | sodium channel inhibitor | epilepsy – partial generalised tonic-clonic seizures, | III | N/A | 2008 | |||
| once-daily | ||||||||
| rosiglitazone XR | PPAR gamma agonist | Alzheimer’s disease | III | |||||
| Lunivia† | non-benzodiazepine GABA agonist | insomnia | Submitted | S:Jul07 | N/A | |||
| Lamictal XR | sodium channel inhibitor | epilepsy – partial seizures, once-daily | Approvable | N/A | AL:Sep07 | |||
| Treximet† | 5HT1 agonist + naproxen | migraine – fixed dose combination | Approvable | N/A | AL:Jun06 | |||
| & Aug07 | ||||||||
| Requip Modutab/XL† | non-ergot dopamine agonist | Parkinson’s disease – once-daily controlled release | Approved | A:Mar07 | AL:Dec07 | |||
| formulation | ||||||||
| GSK Annual Report 2007 | 19 |
| REPORT OF THE DIRECTORS | |
| Delivering the product pipeline for patients | |
| Business review | |
| continued | |
| Estimated | |||||||
| submission | dates | ||||||
| Compound | Type | Indication | Phase | MAA | NDA | ||
| Oncology | |||||||
| 461364 | polo-like kinase inhibitor | cancer | I | ||||
| 690693 | AKT kinase inhibitor | cancer | I | ||||
| 923295† | centromere-associated protein E (CENP-E) | cancer | I | ||||
| inhibitor | |||||||
| Armala(pazopanib) | multi-kinase angiogenesis inhibitor | colorectal cancer | I | ||||
iboctadekin†+ rituximab | lL18 immunomodulator + anti-CD20 | non-Hodgkin’s lymphoma | I | ||||
| monoclonal antibody | |||||||
| totrombopag† | thrombopoietin agonist | thrombocytopaenia | I | ||||
| 1363089 (XL-880)† | C-met kinase inhibitor | papillary renal cell carcinoma, gastric cancer and head & neck squamous cell carcinoma | II | ||||
| ofatumumab† | anti-CD20 human monoclonal antibody | relapsed diffuse large B cell lymphoma | II | ||||
| Armala(pazopanib) | multi-kinase angiogenesis inhibitor | non-small cell lung cancer | II | ||||
| Armala(pazopanib) | multi-kinase angiogenesis inhibitor | ovarian cancer | II | ||||
| Armala(pazopanib) | multi-kinase angiogenesis inhibitor | sarcoma | II | ||||
| Armala(pazopanib) + | multi-kinase angiogenesis inhibitor + ErbB-2 | metastatic breast cancer | II | ||||
| Tyverb/Tykerb | and epidermal growth factor receptor | ||||||
| (EGFR) dual kinase inhibitor | |||||||
| Armala(pazopanib + | multi-kinase angiogenesis inhibitor + ErbB-2 | other cancers | II | ||||
| Tyverb/Tykerb | and EGFR dual kinase inhibitor | ||||||
| Revolade/Promacta† | thrombopoietin agonist | chemotherapy-induced thrombocytopaenia | II | ||||
| Tyverb/Tykerb | ErbB-2 and EGFR dual kinase inhibitor | head & neck squamous cell carcinomas | II | ||||
| (unresectable disease) | |||||||
| Tyverb/Tykerb | ErbB-2 and EGFR dual kinase inhibitor | refractory inflammatory breast cancer | II | ||||
| Armala(pazopanib) | multi-kinase angiogenesis inhibitor | renal cell cancer | III | ||||
| Armala(pazopanib) + | multi-kinase angiogenesis inhibitor + ErbB-2 | inflammatory breast cancer | III | ||||
| Tyverb/Tykerb | and EGFR dual kinase inhibitor | ||||||
| elesclomol (STA-4783)† | oxidative stress inducer | metastatic melanoma | III | ||||
| Hycamtin | topoisomeraseI inhibitor | ovarian cancer first-line therapy | III | ||||
| ofatumumab† | anti-CD20 human monoclonal antibody | refractory chronic lymphocytic leukaemia | III | 2008 | 2008 | ||
| (also rheumatoid arthritis) | |||||||
| ofatumumab† | anti-CD20 human monoclonal antibody | refractory follicular lymphoma (also rheumatoid arthritis) | III | ||||
| Revolade/Promacta† | thrombopoietin agonist | hepatitis C | III | ||||
| Revolade/Promacta† | thrombopoietin agonist | long-term idiopathic thrombocytopaenic purpura | III | 2008 | 2008 | ||
| Tyverb/Tykerb | ErbB-2 and EGFR dual kinase inhibitor | breast cancer, adjuvant therapy | III | ||||
| Tyverb/Tykerb | ErbB-2 and EGFR dual kinase inhibitor | breast cancer, brain metastases | III | ||||
| Tyverb/Tykerb | ErbB-2 and EGFR dual kinase inhibitor | breast cancer, first-line therapy | III | ||||
| Tyverb/Tykerb | ErbB-2 and EGFR dual kinase inhibitor | head & neck squamous cell carcinomas (resectable disease) | III | ||||
| Zunrisa/Rezonic | NK1 antagonist | chemotherapy induced & postoperative nausea & | III | 2008 | 2008 | ||
| vomiting (also depression & anxiety) | |||||||
| Revolade/Promacta† | thrombopoietin agonist | short-term idiopathic thrombocytopaenic purpura | Submitted | 2008 | S:Dec07 | ||
| Hycamtin | topoisomerase I inhibitor (oral) | small cell lung cancer, second-line therapy | Approved | S:May07 | A:Oct07 | ||
| Tyverb/Tykerb | ErbB-2 and EGFR dual kinase inhibitor | refractory breast cancer | Approved | S:Oct06 | A:Mar07 | ||
| Respiratory | |||||||
| 656933 | interleukin 8 antagonist | cystic fibrosis | I | ||||
| 835726 | histamine H1/H3 dual antagonist (oral) | allergic rhinitis | I | ||||
| 1004723 | histamine H1/H3 dual antagonist (intranasal) | allergic rhinitis | I | ||||
| 2190914 (AM-103)† | 5 lipoxygenase activating protein (FLAP) inhibitor | respiratory diseases | I | ||||
| 159797† | long-acting beta2 agonist | COPD, also COPD & asthma in combination with a glucocorticoid agonist | II | ||||
| 159802† | long-acting beta2 agonist | COPD, also COPD & asthma in combination with a glucocorticoid agonist | II | ||||
| 256066 | PDE IV inhibitor (inhaled) | COPD | II | ||||
| 256066 | PDE IV inhibitor (inhaled) | asthma | II | ||||
| 256066 | PDE IV inhibitor (intranasal) | allergic rhinitis | II | ||||
| 573719 | muscarinic acetylcholine antagonist | COPD | II | ||||
| 642444† | long-acting beta2 agonist | COPD, also COPD & asthma in combination with a glucocorticoid agonist | II | ||||
| 679586 | monoclonal antibody | severe asthma | II | ||||
| 681323 | p38 kinase inhibitor (oral) | COPD (also atherosclerosis, neuropathic pain & | II | ||||
| rheumatoid arthritis) | |||||||
| 685698 | glucocorticoid agonist | asthma, also COPD & asthma in combination with a long-acting beta2 agonist (also as Avamys/Veramyst for allergic rhinitis) | II | ||||
| 856553 | p38 kinase inhibitor (oral) | COPD (also atherosclerosis, depression & rheumatoid arthritis) | II | ||||
| 870086 | novel glucocorticoid agonist | asthma | II | ||||
| 961081† | muscarinic antagonist, beta2 agonist | COPD | II | ||||
| darotropium (233705) | muscarinic acetylcholine antagonist | COPD | II | ||||
| mepolizumab | anti-IL5 monoclonal antibody | severe asthma & nasal polyposis (also hypereosinophilic syndrome) | II | ||||
| Avamys/Veramyst | glucocorticoid agonist | allergic rhinitis | Approved | A:Jan08 | A:Apr07 | ||
| REPORT OF THE DIRECTORS | |
| Delivering the product pipeline for patients | |
| Business review | |
| Delivering the product pipeline for patients | |
| continued | |
| Estimated | |||||||
| submission | dates | ||||||
| Vaccine | Type | Indication | Phase | MAA | BLA | ||
| Paediatric Vaccines | |||||||
| Hib-MenCY-TT | conjugated | Neisseria meningitisgroups C & Y disease & | III | ||||
| Haemophilus influenzaetype b disease prophylaxis | |||||||
| MenACWY-TT | conjugated | Neisseria meningitisgroups A, C, W & Y disease | III | ||||
| prophylaxis | |||||||
| Infanrix-IPV/Kinrix | subunit – inactivated | diptheria, tetanus, pertussis + poliomyelitis prophylaxis (booster-5th dose) | Submitted | S:Apr07 | |||
| Synflorix | conjugated | Streptococcus pneumoniaedisease and non-typeable | Submitted | S:Dec07 | |||
| Haemophilus influenzaeprophylaxis for children | |||||||
| Rotarix† | live attenuated (oral) | rotavirus-induced gastroenteritis prophylaxis | Approved | A:Feb06 | S:Jun07 | ||
| Other Vaccines | |||||||
| Cytomegalovirus | recombinant | cytomegalovirus infection prophylaxis | I | ||||
| HIV | recombinant | HIV infection prophylaxis | I | ||||
| S. pneumoniaeadult | recombinant – conjugated | Streptococcus pneumoniaedisease prophylaxis | l | ||||
| Dengue fever | attenuated tetravalent vaccine | Dengue fever prophylaxis | ll | ||||
| Epstein-Barr virus† | recombinant | EBV infection prophylaxis | ll | ||||
| Hepatitis E virus† | recombinant | hepatitis E prophylaxis | ll | ||||
| Mosquirix | recombinant | malaria prophylaxis | ll | ||||
| Tuberculosis | recombinant | tuberculosis prophylaxis | II | ||||
| Varicella Zoster virus | recombinant | Varicella Zoster prevention | II | ||||
| Flu pandemic† | H5N1 inactivated split – monovalent | pandemic influenza prophylaxis | III | 2008 | |||
| (Quebec) | |||||||
| Flu pre-pandemic† | H5N1 inactivated split – monovalent | pandemic influenza prophylaxis | III | 2008 | 2008 | ||
| (Quebec) | |||||||
New generation flu vaccine | inactivated split – trivalent | seasonal influenza prophylaxis for the elderly | III | ||||
| Simplirix | recombinant | genital herpes prophylaxis | lll | ||||
| Boostrix | subunit | adult booster for diphtheria, tetanus & pertussis | Submitted | S:Feb08 | |||
| Flu pandemic† | H5N1 inactivated split – monovalent | pandemic influenza prophylaxis | Submitted | S:Feb07 | |||
| (Dresden) | |||||||
| Flu pre-pandemic† | H5N1 inactivated split – monovalent | pandemic influenza prophylaxis | Submitted | S:Jan07 | |||
| (Dresden) | |||||||
| Cervarix† | recombinant | human papilloma virus infection prophylaxis | Approved | A:Sep07 | AL:Dec07 | ||
| Antigen Specific Cancer Immunotherapeutic (ASCI) | |||||||
| MAGE-A3 ASCI | recombinant | treatment of melanoma | II | ||||
| MAGE-A3 ASCI | recombinant | treatment of non-small cell lung cancer | III | ||||
| GSK Annual Report 2007 | 21 |
| REPORT OF THE DIRECTORS | |
| Being the best place for the best people to do their best work | |
| Business review | |
| Being the best place for the best people to do their best work | |
| GSK employs over 100,000 people in more than 100 countries and is committed to creating the best place for the best people to do their best work. | |
Recruitment, talent management and leadership development
Attracting and recruiting the best people is critical to enhancing and sustaining GSK’s performance. Recruiters across GSK are focused on actively targeting the best talent and assessing their fit with the organisation for many key roles. GSK seeks to recruit people with the highest level of integrity. Interview questions with specific ethical and integrity components have been developed for inclusion in the standard interview questionnaire during 2008.
The annual performance and development planning (PDP) process ensures that employees set business-aligned objectives and behavioural goals. PDPs are reviewed throughout the year, culminating with an end of year review that is factored into compensation decisions. The annual talent management cycle identifies the highest performing people in each business and key talent is developed through tailored management and leadership programmes, exposure to top management through programmes such as the Chief Executive Forum and stretch assignments. A pool of potential successors is identified for each Vice-President position and other critical roles throughout the Group.
Performance and reward
Reward systems are designed to support a culture of high performance and to attract and retain the best people. Performance based pay and bonuses, share awards and share options align employee interests with the meeting of business targets.
Communication and employee involvement
The Group conducts a Global Leadership Survey (GLS) every two years. The most recent survey was conducted in 2006 among more than 10,000 managers to gauge opinions on critical issues such as culture and confidence in the Group’s future. Scores on morale and engagement have steadily increased since 2002 and compare very favourably with global benchmarks (42 top-ranked companies). In the 2006 survey, 90% of managers were ‘proud to be part of GSK’ and 86% would ‘gladly refer a friend or family member to work for GSK’. Each business develops action plans to address areas for improvement based on results from the GLS and other surveys.
The Group also consults employees on changes that affect them and discusses developments in the business with a European Employee Consultation Forum and similar bodies in countries where this is national practice.
Employee numbers by region
ImproveBusiness ethics and reputation
GSK expects employees to meet high ethical standards in all aspects of business by conducting activities with honesty and integrity, adhering to corporate responsibility principles and complying with applicable laws and regulations. The 2006 GLS showed 91% believed that ‘people in their department showed commitment to performance with integrity’ and 82% agreed that they ‘can report unethical practices without fear of reprisal’. A half-day workshop on Ethical Decision-making has now been extended to three e-learning modules, which are being implemented across GSK.
Commitment to the GSK Code of Conduct is reinforced by a senior management certification programme, and each year over 12,000 managers certify that they have complied with ‘Performance with Integrity’ principles. GSK audits its operations regularly to ensure that relevant standards, such as those in marketing practices, are reached or exceeded.
Diversity
The diversity and inclusion initiatives focus on improving performance. In the fifth year of the annual Multicultural Marketing and Diversity Awards, award winning projects repeatedly demonstrated the business value of understanding diverse perspectives and leveraging those differences to make a positive difference in the workplace, with customers and in the communities served. In 2007, the global management population was 63% male and 37% female. For more details on diversity measures, see the Group’s Corporate Responsibility report.
The Group is committed to employment policies free from discrimination against existing or potential staff on the grounds of age, race, ethnic and national origin, gender, sexual orientation, faith or disability. GSK is committed to offering people with disabilities access to medicinesthe full range of recruitment and career opportunities. Every effort is made to retain and support employees who become disabled while working with the Group.
Healthy high performance
Healthy, energised and engaged employees together with healthy and sustainable ways of working contribute to the performance of the Group. Global policies on employee health are supported by mandatory standards that integrate employee health and safety and environmental requirements. A commitment to flexible working through flexi-time, tele-conferencing, remote working and flexible work schedules, recognises that employees work best in an environment that helps them integrate their work and personal lives.
The Group’s Employee Health Management function is actively delivering and implementing team and personal resilience programmes which are now available in 13 languages. In 2007, in partnership with the Group’s Leadership and Development function, Energy for Performance training has been introduced in order to improve further the potential of employees.
| 22 | GSK Annual Report 2007 |
| REPORT OF THE DIRECTORS | |
| Improving access to medicines | |
| Business review | |
| Improving access to medicines | |
| GSK is committed to contributing to health improvements in a sustainable manner. In the developing world, this includes not-for-profit pricing, community investment programmes and other innovative solutions, while in the developed world the focus is on patient assistance programmes. | |
Access to healthcare in the developing world
Access to healthcare in developing countries remains a major challenge to the global community. The problem, which is rooted in poverty, anddemands a lacksignificant mobilisation of political will, continues to demand a significant mobilisation ofadditional resources and a true spirit of partnership. It must be tackled as a shared responsibility by all sectors of global society. The Group does not have the mandate, expertise or resources to address the underlying problems that exist. However, GlaxoSmithKlineGSK continues to play a vital role, through its commitment to R&D into diseases particularly prevalent in the developing world, through its programme of preferential pricingnot-for-profit prices for its anti-retrovirals (ARVs), anti-malarials and vaccines, through its community investment programmes (see page 24) and through its willingness to seek innovative solutions, such as voluntary licencinglicensing arrangements.
Preferential pricing arrangementsprogrammeGlaxoSmithKlineGSK has offered its vaccines to key organisations for vaccination programmes in developing countries at preferential prices for over 20 years. The Group also sets a single sustainable, not-for-profit price for each of its ARVs and anti-malarials to a wide range of customers in the Least Developed Countries (UN definition) and sub-Saharan Africa, as well as projects fully-fundedCountry Coordinating Mechanism-projects fully funded by the Global Fund to Fight AIDS, TB, and Malaria and the US President’s Emergency Plan for AIDS Relief. This means that the not-for-profit prices are offered in a total of 100 countries.Relief (PEPFAR).
GlaxoSmithKlineGSK is committed to contributing to health improvements in a sustainable manner. The prices for its ARVs and anti-malarials are therefore set at levels at which no profit is made, but direct costs are covered, allowing supply to be sustained for as long as required. The Group has undertakenDuring 2007, GSK shipped to reduce these prices whenever possible. Although two reductions were announceddeveloping countries 13 million tablets of not-for-profit-pricedCombivir and 72 million tablets of not-for-profit-pricedEpivir. Some of GSK’s licensees are now supplying key markets in 2003, no price reductions were possible in 2004.a more significant way.
Preferential pricing is improving access. The Group has signed over 200 agreements, covering 57 of the world’s poorest countries, to supply ARVs at preferential prices. Customers include governments, non-governmental organisations (NGOs), hospitals, academic institutions and private employers.
The offer of not-for-profit prices requires a sustainable framework, combining the Group’sGSK’s commitment to preferential pricing with commitments from governments of the developed world to avoid price referencing against preferentially priced medicines and from all governments to help prevent product diversion. GlaxoSmithKlineGSK has taken steps to minimise the threat of diversion and is now able to supply over 50 countries with Combivir, Epivir and Trizivir in special access packs. Similar efforts are underway to secure widespread regulatory approval for Retrovir and Epivir Syrup the registration of specific access packs and to register differentiatedor access tablets (differentiated red (astablet as opposed to the traditional white) Combivir and Epivir tablets across a number of International markets. During 2004,for its key ARVs. GSK remains the only Group successfullyto have registered nine of its ARVs under the European Union’s Anti-Diversion Regulation. It also continued to encourage other countries to take the necessary steps to ensure the introduction and strict enforcement of appropriate anti-diversion measures.
Innovative solutionsVoluntary licencesDuring 2004, GlaxoSmithKline granted fiveGSK has shown industry leadership in granting voluntary licences to African genericseight generic companies for the manufacture and salesupply of ARVs to both the public and private sectors in sub-Saharan Africa. These licences build upon the Group’s agreement with Aspen Pharmacare, sub-Saharan Africa’s largest generic company, first signedGSK is also a leader in September 2001,collaborating in Public-Private Partnerships to enable new drug discovery and demonstrate GlaxoSmithKline’s ongoing commitmentdevelopment to increasing access to essential medicines through innovative solutions.take place more effectively.
Looking aheadGlaxoSmithKlineGSK will continue to build on its products,product, pricing and partnership commitments to help improve healthcare in the developing world. However, a significant increase in funding from the global community is still needed. It is also important to maintain incentives for R&D through protection of intellectual property. There is, for example, neither a cure nor a vaccine for HIV/AIDS.
While much washas been achieved, in 2004, sustainable progress will only occur if the significant barriers that stand in the way of better access to healthcare are tackled as a shared responsibility by all sectors of global society – governments, international agencies, charities, academic institutions, the pharmaceutical industry and others.
Access to healthcaremedicines in the developed world
GlaxoSmithKline plays an active roleProgrammes in improving the healthcare of people who have limitedUSA
GSK is working to provide access to medicines. During 2004,medicines for people with limited financial resources and without prescription drug insurance.
2007 marked the Group’s Bridges tolaunch of GSK’s newest patient assistance programme, GSK Access, for eligible patients enrolled in Medicare Part D prescription drug plans. Enrolment in this new programme was encouraged through a multi-million dollar national advertising campaign in major magazines and Commitment to Access programmes provided over $372 million worth of medicines to qualifying low-income US residents. newspapers.
For uninsured Americans who do not qualify for Medicare beneficiaries, there is the GlaxoSmithKline Orange Card programme which offers qualifying US senior citizens 20 to 40 per cent discounts off their outpatient GlaxoSmithKline medicines. More than 175,000 individuals have signed up for the programme. The Group is committed to maintaining this programme until a Medicare prescription benefit is in place in 2006.
The Group is also a founding member of Together Rx, a multi-company card programme through which seven major participating pharmaceutical companies offer savings in the USA on more than 155 widely prescribed medicines. Together Rx participants can save up to 40 per cent off the usual amount for their prescriptions. By the end of 2004 over 1.4 million people had joined this programme.
In addition, GlaxoSmithKlineor Medicaid, GSK and nine11 other pharmaceutical companies created Together Rx Access, a savings programme for qualified individuals offering reductions in the pharmacy cost on more than 300 medicines. Over 820,000 Together Rx Access cardholders saved about $24 million in 2007.
GSK also participates in the Partnership for Prescription Assistance (PPA), a national service that helps match people in need with prescription medicine access programmes. To date, PPA has provided patients in the USA who lackwith information about assistance to obtain necessary medicines.
Launched withTykerb to help with access to this medicine,TykerbCARES is a single point of contact for physicians and patients.TykerbCARES provides reimbursement support and adherence support through services like pre-therapy counselling from a trained oncology nurse.
Patient Advocacy
The Patient Advocacy initiative has demonstrated significant progress since its inception in 2002. Initially launched as a US programme, it is now a critical initiative throughout GSK. Patient Advocacy teams in the USA and Europe share best practices and established processes to optimise interaction with patient groups. Typically these relationships provide mutual opportunities: to learn about patient needs and priorities and for patient groups to develop an understanding of drug development challenges.
In 2007, GSK continued to work with patient groups to educate them on issues of mutual concern, to advocate for access to medicines and treatment and to improve its reputation with them, governments and the media through efforts to promote transparency. GSK is considered to be a trustworthy partner with patient groups, and has developed guidelines and procedures for working with patient groups that are being imitated throughout the industry.
Programmes in other countries
The Group has also introduced Orange Cards providing discounts on certain GSK prescription drug coverage. Through Together Rx Access, medicines for eligible patients in a number of other countries. The nature of the participating companies offer savings of about 25 to 40 per cent offdiscounts varies between countries and the usual pharmacy cost on over 275 medicines.way in which its healthcare system operates.
| GSK Annual Report 2007 | 23 |
| REPORT OF THE DIRECTORS | ||
| Corporate responsibility and community investment | ||
| Business review | ||
| Corporate responsibility and community investment | ||
| In 2007, GSK made product, cash and other donations valued at £282 million to support over 100 community programmes around the world |
Be the best place for the best peopleCommitment to do their best workcorporate responsibility
GlaxoSmithKline people
GlaxoSmithKlineGSK is committed to creating the best place for the best peopleconnecting business decisions to do their best work.
Performanceethical, social and rewardReward philosophyenvironmental concerns. Thus, corporate responsibility is an integral and programme development underscore GlaxoSmithKline’s commitment to a performance culture. Performance based pay, share awards, share options and performance and development planning contribute to retention of key talent, superior performance and accomplishment of business targets.
The annual performance and development planning (PDP) process ensures that individuals set business goals aligned with corporate strategies, set behavioural goals, and create a development plan. PDP’s are reviewed throughout the year, culminating with an end of year review that is factored into compensation decisions.
Performance with Integrity is central to operating at GlaxoSmithKline. The recent Leadership Survey showed over 90 per cent believe that “people in their department show commitment to performance with integrity”.
A commitment to flexible working through flexi-time, teleconferencing, remote working and flexible work schedules, recognises that employees work best in an environment that helps them integrate their work and personal lives.
DiversityThe GlaxoSmithKline diversity initiative focuses on improving performance by responding to the diverse needs of employees, customers, and external stakeholders. At the second annual Multicultural Marketing and Diversity Awards, 80 entrants from five countries highlighted innovative activities that demonstrated business impact. In 2004, the global management population by gender was 65 per cent male, 35 per cent female. For more details on diversity measures, see the Corporate responsibility report in the section, Employment Practices.
The Group is committed to employment policies free from discrimination against potential or existing staff on the grounds of age, race, ethnic and national origin, gender, sexual orientation, faith or disability. GlaxoSmithKline is committed to offering people with disabilities access to the full range of recruitment and career opportunities.
RecruitmentWhilst voluntary turnover is only four per cent, GlaxoSmithKline is committed to continuing to enhance its recruitment processes. Candidate Care transforms the recruitment process into a customer experience, aiming to build positive relationships with those who seek to join and stay with the Group.
Talent management and leadership developmentEvery individual creates a development plan yearly asembedded part of the PDP process. Key talentway GSK does business.
In 2003, GSK published a set of Corporate Responsibility principles to provide guidance on the standards to which the Group is then identified through Talent Reviews conducted by each businesscommitted. This sets out the approach to 10 areas: standards of ethical conduct, research and function. Individuals are given feedbackinnovation, products and customers, access to medicines, employment practices, human rights, community investment, caring for the environment, leadership and advocacy, and engagement with stakeholders. The Group reports annually on development needs, and key talentprogress in upholding these principles in its Corporate Responsibility Report, which is developed through new positions, assignments and courses. A pool of successors is identified for all Vice-President positions and other critical positionsavailable on GSK’s website.
Partnership success
GSK works as a partner with under-served communities in the organisation.
Individualsdeveloped and developing world. It supports programmes that are developed for global leadership positions through targeted job moves in different businessesinnovative and geographies. A variety of programmes are offered internallysustainable and that bring real benefits to develop leaders and managers who innovate, inspire and execute well.
Communication and involvementA senior management conference, held in February 2004, allowed more than 1,000 delegates to be briefed directly by members of the Corporate Executive Team on key challenges facing the Group and to debate strategies for addressing them. The event also recognised individuals who made outstanding contributions in 2003.
In May 2004, a second Global Leadership Survey was conducted among more than 10,000 managers to gauge opinion on critical issues such as culture and confidence in the Group’s future. Results showed significant improvement on 29 of 31 items compared with 2002 results. Compared with global benchmarks, managers rate highly on fostering alignment between personal goals and the GlaxoSmithKline mission and fostering an environment of ethics and integrity. In the survey, 80 per cent of managers were “proud to be part of GlaxoSmithKline” and would “gladly refer a friend or family member to work for GlaxoSmithKline”.
With regard to improvement areas, managers report that GlaxoSmithKline should continue to enhance our environment as a place where people are able to do their best work and engage managers in making the changes necessary to compete effectively. Each business and function has developed action plans to address areas for improvement.
these communities. The Group continually seeks ways of improving the efficiency and effectiveness of employee communications, in order to maximise awareness of critical information within a diverse global audience. A streaming video project is underway, which will allow senior executives to communicate more frequently with employees.
Health and well-beingGlobal policies on Employee Health are supported by mandatory standards that integrate employee health and safety and environmental requirements. These standards are applied to all the Group’s facilities and operations worldwide.
Based on the first year data from the global health experience, three health areas have been identified for additional focus. These are musculoskeletal, mental health and conditions related to material handling. Multidisciplinary teams are working to set baselines, align reporting and develop interventions. This effort will help to reduce the incidence and impact of these conditions in the future.
Human resources services and information systemsGlaxoSmithKline’s human resource delivery strategy is designed to make the most of technology. Human resources services and information are delivered through low cost, highly effective channels that make it easy for job candidates, employees and retirees to access information about employment, compensation and benefits, policies and programmes. These include intuitive personalised web based tools, available to employees in many locations.
Invest in communities
Success through partnership
GlaxoSmithKline continues to build on its history of community investment programmes and support for better healthcare delivery and education in under-served communities around the world. The Group does this through active engagementengages with numerous external stakeholders, including the World Health Organization (WHO) and members of the not-for-profit community. It funds community-ledcommunity led initiatives acrossaround the world and donates medicines to support humanitarian efforts and community-basedcommunity based healthcare. Many of the programmes are long term commitments that help bring about sustainable change in communities.
Community investment
GlaxoSmithKline’sGSK’s global community investment activities in 20042007 were valued at £328£282 million, equivalent to 5.4 per cent3.8% of Group total profit before tax. This comprised product donations of £260£224 million, cash giving of £48£41 million, other in-kind donations of £2£3 million andplus costs of £18£14 million to manage and deliver community programmes in more thanover 100 countries.
Product donations in 20042007 were as follows:
ProductAll product donations (total £260 million)valued at wholesale acquisition cost (WAC).
GlaxoSmithKline’sGSK’s cash giving was targeted primarily at health and education initiatives.initiatives as follows:
Breakdown of cash giving 
(total £48 million)
In the UK, GlaxoSmithKlineGSK contributed £4£6 million in 20042007 to its continuing corporate programme of charitable activities supporting over 70 organisations in health, medical research, science education, the arts and the environment. In addition Group companies in the UK provided a further £4 million for community purposes. Corporate programmes
Programmes in North America focused on improving public education and access to better healthcare for children and senior citizensseniors both nationally and locally with funding of $12$35 million. On National Philanthropy Day in the USA, GSK received the Excellence in Corporate Philanthropy Award from the Committee Encouraging Corporate Philanthropy (CECP).
GSK does not operate a single charitable foundation for its community investment programmes, but has a number of country based foundations. The grants made by these foundations in 2007 are included in the investment total.
Global Health Programmes
Eliminating lymphatic filariasis
The Group’s effort to eliminate the disabling disease, lymphatic filariasis (LF) from the world, continued in close partnership with the governments of countries where the disease is endemic, the WHO and over 40 partner organisations. GSK is committed to donate as much of the anti-parasitic drug albendazole as required to treat the one billion people at risk in over 80 countries. In addition nearly $162007, 150 million wasalbendazole treatments, worth £14 million at wholesale acquisition cost, were donated to 19 countries. Since the global elimination programme started in 2000, a cumulative total of almost 750 million albendazole treatments have been donated.
Positive Action on HIV/AIDS
Positive Action is GSK’s pioneering global programme working with communities affected by AIDS. Started in 1992, it supports community-based organisations to deliver effective HIV and AIDS education, prevention and healthcare services. During 2007, Positive Action worked with 16 partners to support programmes in 19 countries. Positive Action’s larger programmes operate in Mexico, Kenya, India, China, Cambodia and Vietnam.
The GlaxoSmithKline African Malaria Partnership
GSK’s malaria advocacy programme ‘Mobilising for Malaria’ has launched country Coalitions Against Malaria in the Group’s US-based businessesUK, Belgium, France, Ethiopia and Cameroon to regional community activities.
increase awareness of malaria and mobilise resources. During 2007 Innovation Grants for Malaria Advocacy were awarded to four organisations in Africa, working in Nigeria, Congo, Senegal and Uganda. The benefits of GSK’s three previous behavioural development programmes targeting malaria in eight African countries continue to be seen.
| GSK Annual Report 2007 | |
| Business review | ||
Invest in communities PHASEcontinued
PHASE
The PHASE initiativeprogramme (Personal Hygiene andAnd Sanitation Education), initiated by GSK in 1998, is now providing education to thousands of school children in Kenya, Uganda, Zambia, Nicaragua, Peru, Mexico, Tajikistan and PeruBangladesh to improve their health and hygiene to fight infectious diseases. In 2004,2007, the Group committed three-yearthree year funding of £226,000over $1.8 million to extend the programme into Ugandato Indonesia and Bolivia in partnership with Save the Ministry of Health and AMREF. The achievements ofChildren, USA. This also includes funding to introduce PHASE were again recognised with a World Business Award in support ofto the Millennium Village project which employs science-based interventions to meet the Millennium Development Goals and an industry award for disease prevention and education.Goals.
Humanitarian product donations
During 2004, GlaxoSmithKline2007, GSK donated essential products, such as antibiotics, through non-profit partners including AmeriCares, Direct Relief International, MAP International and Project HOPE, in response to support humanitarian relief efforts and community healthcare. For example, the Group donated products following the floods in Bangladesh, hurricanes in the USA and the Caribbean, typhoons in the Philippines, the conflict in Sudan, and the Asian tsunami.
In 2004, theThe total value of the Group’s international humanitarian product donations was £50£16 million. This excludes albendazole donated as part of the Group’s commitment to the lymphatic filariasis elimination programme. Product donations are valued at wholesale acquisition cost, which is the wholesale list price, not including discounts, and is a standard industry method.method of valuation.
Community initiativesGlaxoSmithKlineGSK is dedicated to strengthening the fabric of communities where it operates through providing health and education initiatives and support for local civic and cultural institutions that improve the quality of life. GlaxoSmithKline’s
GSK’s contribution to improve healthcare includes a three-year grant of more than $2almost $3 million which has helpedover three years to the Children’s Health Fund to expand The Children’s Health Fund’stheir Referral Management Initiative (RMI) into seven US states, ensuringto sites in Philadelphia, including the Delaware Valley Community Health Center. The RMI ensures continuity of specialist medical care for high-risk children who are often homeless.
The Group supported2007 marked the Arthur Ashe Institute for Urban Health with grants totalling $350,000 over three years for core funding andtenth anniversary of the Community Health Empowerment Programannual GlaxoSmithKline IMPACT Awards to provide health education for low-income neighbourhoods in non-traditional venues, such as churches and shops.
GlaxoSmithKline continues its 10 year partnership with Barretstown in Ireland and L’Envol in France which provide life-changing activity programmes backed by the medical community for European children with cancer and life-threatening illnesses, helping them to rediscover their confidence, self-esteem and participate fully in their everyday lives. They received £250,000 and £100,000, respectively.
The annual Impact Awards recognise excellence in the work of non-profit community health organisations across the UK and in the Greater Philadelphia area of the USA. OverEach year over 20 charities receivedreceive unrestricted awards for their work dealing with diverse and difficult social issues such as domestic and community violence, sexual health services for young people, community health support and child abuse.counselling services.
To further medical research, over £500,000£490,000 was provided to three UK medical charities, such as Breakthrough Breast Cancer, Cystic Fibrosis Trust, DEBRA, Ehlers-Danlos Support GroupPrimary Immunodeficiency Association, Research into Ageing and the Motor Neurone Disease Association.
WellChild.
The Group supported the British Lung Foundation’s Baby Breathe Easy programme with a two year grant of £386,000, funding a pilot scheme which will be run in nine regions across the UK. This supports parents and carers of babies and children under five, with recurring chest problems.
Education initiativesThe Group’s effortsDuring 2007, GSK continued to improve public and science education includedsupport the Institute for a three year grant of $300,000 toCompetitive Workforce, a business coalition staffed by the National Board for Professional Teaching Standards to increase the number of science teachers pursuing certification in North Carolina and Philadelphia.
A grant of $50,000 to theBusiness Civic Leadership Center for Corporate Citizenship of the US Chamber of Commerce links the Department of Education intoCommerce. This is aimed at improving education and creating a programme to review how education impacts the economy. The Philadelphia Education Fund received a grant of $129,000skilled workforce for the Middle Grade Matters campaign to improve middle-level education for children aged 11-16.future.
GlaxoSmithKline continued to support the INSPIRE (INnovative Scheme for Post-doctoral researchers in Research and Education) scheme, developed in partnership with Imperial College London and the Specialist Schools Trust, withGSK also supports a £1 million donation over four years. INSPIRE places post-doctoral researchers in specialist science schools to assist with science teaching.
Sciencerange of local initiatives in the Summer,USA. For example ‘Science in the Summer’, a free library-based science education programme in the Philadelphia area teaching basic scientific concepts, continued to receive support with a grant of $365,000. Nownearly $427,000. GSK has also been a major sponsor of the University of North Carolina’s travelling science laboratory, Destiny, since its inception in its 19th year, more than 68,0001999. Destiny serves approximately 100 under-served secondary schools and reaches 4,000 students per year.
In 2007, GSK helped to launch the CREST Star Investigators education initiative. This programme has been developed in partnership with the British Association for the Advancement of Science to provide science activities and awards for after school clubs in UK primary schools. 5,000 schools and 55,000 children have participatedare expected to be taking part by 2010.
Only 25% of secondary school science teachers in England are chemistry specialists. Chemistry for Non-Specialists has been developed by the programme. Science AcrossRoyal Society of Chemistry to train teachers to teach chemistry with confidence, flair and enthusiasm. GSK is supporting the World, an award-winning international education programme that uses web-based resources to promote discussionwith a donation of science issues between 90,000 children in schools in£450,000 over 100 countries, received a grant of £100,000.three years.
Employee involvementGlaxoSmithKlineGSK employees are encouraged to contribute to their local communities through employee volunteering schemes. Support varies around the world but includes employee time, cash donations to charities where employees volunteer and a matching gifts programme. In many countries, GlaxoSmithKline offers tax-efficient methods for employee giving in accordance with local taxation guidelines.gift programmes.
In 2004,2007 in the USA, the Group matched more than 15,00016,500 employee and retiree gifts at a value of over $4$5 million. The Group also matched the $1.3$1.1 million of employee donations to the GlaxoSmithKline andGSK’s annual United Way campaign giving a combined contribution of $2.6 million. In addition, GlaxoSmithKline’s Investment in Volunteer Excellence (GIVE) programmecampaign. GSK’s GIVE program provided grants of over $390,000 to 700 charitablealmost 380 organisations where US employees or their partners have volunteered at least 50 hours in the year.volunteered.
GlaxoSmithKline’sGSK’s Making a Difference programme in the UK provided grants of £269,000almost £260,000 to over 400nearly 380 non-profit organisations orand registered charities based on employee involvement.
| GSK Annual Report 2007 | 25 |
Consumer Healthcare
Current business
GlaxoSmithKline Consumer Healthcare manufactures and markets consumer brands in the healthcare industry. The organisation has structure and responsibility at global, regional and local levels. Operations span the majority of the world’s geography and are sold principally across two major trade channels, grocery and pharmacy. Brands are marketed across the full regulatory spectrum from prescription through to free sale.
The environment in which the Consumer Healthcare business operates has become ever more challenging:
New strategyThe vision of the Consumer Healthcare business is to be the fastest growing consumer healthcare group, through innovation centred on consumers and delivered by science.
In order to conduct business more effectively in the current environment the Consumer Healthcare business strategy and operating model have been redesigned. The new model was implemented in 2004 and is now operational and targeted to deliver faster sales growth. It will achieve this through a vigorous focus on delivering new product developments, tightly aligned with consumer needs. The new model more effectively welds together R&D, marketing and commercial operating units with a new culture providing:
New structureThe focus of the new operating model is on brands and growth opportunities. Consequently brands are split into three categories and the business structure is centred on:
Global brands (40 per cent of global sales)For those brands that have sales in multiple markets and similar positioning such that they may be developed most effectively using a global approach, a new team called the Future Group has been created. This group assumes responsibility for consumer and market understanding, brand equity and strategy, innovation pipeline and communication. The Future Group comprises dedicated resources for idea generation and innovation development covering both product packaging and the whole communications mix.
The five Global brand concepts and teams are:
The Future Group also includes centres of excellence in global project management, medical marketing and e-marketing. Support functions have also reorganised to more effectively serve the new model.
Lead market brands (30 per cent of global sales)These brands are large and marketed in several territories but generally with one anchor market that can lead the development of these businesses for other markets. They still enjoy central R&D resource, and include such brands as Lucozade, Ribena, Horlicks, Tums and Dr Best.
Enterprise brands (30 per cent of global sales)The remaining valuable local brands are managed in a new model which retains local responsibility for the brand, communications and innovation. The enterprise brands are also supported by global, regionally-focused resources, to enable application of the best practice and the cross-pollination of innovation.
The success of Consumer Healthcare’s new business model will be reflected in the sales growth of the Global, Lead market and Enterprise brands.
Research and development – Consumer Healthcare
R&D has aligned itself closely with the new Consumer Healthcare operating model and structure. For the Global brands, it now mirrors the commercial structure with R&D teams paired with Future Group teams and located in the principal centres for Consumer Healthcare R&D at Weybridge in the UK and in Parsippany in the USA; with this co-location, these sites are now termed Innovation Centres. The focus of R&D is on the identification and rapid development of novel products that bring benefits to consumers in the over-the-counter (OTC), oral care and nutritional healthcare markets.
Global manufacturing and supply
GlaxoSmithKline hasGSK manufactures a large portfolio of products, ranging from tablets and toothpaste to inhalers and complex capsules, in over 28,000 different pack sizes and presentations.
Manufacture of medicines beginsstarts with the development of a therapeutic active ingredient (bulk active) in a selected formulation. Global Manufacturing and Supply (GMS) develops manufacturing processes for full scale volume production of active compounds at primary manufacturing sites. ConvertingSecondary sites then convert these active compounds into a finished dosage formulation is the responsibility of the secondary manufacturing sites.medicines.
GMS operates as a single global network of 82 sites in 37 countries. Each year GMS produces around 6,000 tonnes of bulk actives and overmore than four billion packs, which are packaged and delivered for salesold in over 160140 countries. Throughout the world itIt also supports approximatelyabout 2,000 new product and line extension launches aevery year.
By adopting leading edge practices and developing its people, GMS expects to derive benefits from:provides:
| • | a secure source of supply of high quality products |
| • | compliance with regulatory requirements and customer expectations |
| • | best in class cost. |
Organisation
Supply divisions
GMS operates as a single global network of 79 sites in 37 countries. The former five geographic and supply chain structuressites are nowgrouped into four supply divisions, with sites grouped together based uponon common business drivers, areas of expertise and the commercial activities that they support. These four divisions are described below:
Primary supply and Antibiotics
Primary supply and Antibiotics focuses on ensuring the supply ofhas 12 sites in six countries, supplying high quality, and competitively priced bulk actives andactives. The division is focused on driving improvements in primary technologies and processes. It also supports the delivery of maximum value from the antibiotics franchise through a combined primary and secondary approach to cost competitive supply and response to market opportunities and customer needs. There are 18 sites in eight countries in Primary supply and Antibiotics.
Consumer Healthcare supplyConsumer Healthcare supply focuses on delivering high-quality, competitively-produced products and offering the capability for rapid new product introduction in a highly innovative and competitive business which has far shorter time frames than pharmaceuticals. New technologies have become a fundamental platform for lowering costs and providing flexibility in operations. There are 25 sites in 18 countries in Consumer Healthcare supply.
Regional pharma supplyRegional pharma supply focuses on several key activities, the supply of products that are key in one or more regions, the supply of products that are important in a particular market, and the tailoring of packaging to meet specific local requirements. A key focus for the regional pharma supply team is on reducing costs so that GlaxoSmithKline can compete more effectively in all its markets. There are 31 sites in 23 countries in Regional pharma supply.
New product and global supply
New product and global supply focuses on ensuring
There are 10 new product and global supply sites in seven countries. Sites work closely with R&D’s development team to ensure that the appropriateright technical competencies existare in place to support rapid and successful new product introduction. It works closely with R&D’s development team to do this. ItThese sites also ensuresensure secure supply of the key brands that are sold across many markets and have global distribution.markets. This division is the focal point for developing and introducing new secondary manufacturing technologies for GMS. It co-ordinates with Primary
Regional pharma supply operations
Regional pharma supply operates to ensure optimal alignment between the two divisionssupply key products in particular regions or markets and a full value stream approachtailor packaging to introducing new products.meet specific local requirements. This division focuses on reducing costs, allowing GSK to compete more effectively in all its markets. There are eight29 regional pharma supply sites in six countries in New product and global supply.22 countries.
Operational excellenceConsumer Healthcare supplyGMS has developedConsumer Healthcare supply delivers high-quality, competitively priced products and supports rapid new product introduction in a set of metricshighly innovative and competitive business with far shorter time frames than pharmaceuticals. New technologies have become a common methodologyfundamental platform for driving improvement;innovation, lowering costs and providing flexibility in particular these have focused on increasingoperations. There are 28 sites in 21 countries.
Operational excellence
Within GMS, operational excellence provides the capability to drive improvements in process robustness, of the manufacturing processes to reduce wastequality, performance and maintain the highest quality standards. Extensive leadershipcustomer service. Operational excellence is underpinned by extensive education has been carried out to reinforceand a culture of continuous improvement, with staff empoweredimprovement.
Vision Factory
GSK introduced the Vision Factory initiative to solve problems inwork towards a rigorous, controlled and structured way. All this has givensimpler, more efficient operating model within GMS. Vision Factory is enabling manufacturing operations to accelerate the capability to drive step-changeimprovement in performance and to implement improvements rapidlycost control.
Quality
The quality organisation oversees product quality across the supply chain, from suppliers and third party manufacturers through manufacturing network.to the supply operations that deliver products into the market. The quality organisation focuses on improving quality and compliance by increasing product quality understanding, and harmonising the quality approach across all sites.
Since the formation of GlaxoSmithKline, merger rationalisation and operational excellence initiatives have reduced the number of manufacturing sites by 33 (29 per cent).
External suppliersManufacturingGMS spends over £2 billion annually with many external suppliers, every year, including the purchase ofpurchasing active ingredients, chemical intermediates, packaging components, and part-finished and finished products. GMSIt takes appropriate steps to protect its supply chains from any disruption resulting from interrupted external supply through appropriate stock levels, contracting and alternative registered suppliers.disruption.
Procurement
Widely recognised by industry analysts as a best practice leader, procurement works collaboratively to develop and implement sourcing strategies which ensures that GSK receives best value when buying goods and services. GSK leverages its procurement activities across the Group.
Vaccines supply chainVaccineGSK’s global vaccine manufacturing network is located primarily at Rixensart and Wavremanaged from the vaccine division’s headquarters in Belgium, withBelgium. By being present in all the three other sites in France, Germany and Hungary and two joint ventures in China and Russia. major regions, GSK aims to ensure effective supply of vaccines across the globe:
| • | in Europe, vaccine manufacturing is located primarily at Rixensart and Wavre in Belgium, with three other sites in France, Germany and Hungary where the site is being extended. |
| • | in North America, GSK established its vaccine production network in 2005 through three major acquisitions. It has a production site in Hamilton, Montana manufacturing MPL, a key component of GSK’s novel and proprietary adjuvant systems, a vaccine production site in Marietta, Pennsylvania and flu vaccine manufacturing facilities in Laval and Ste Foy, both in Quebec, Canada. |
| • | in the International region, new vaccine production facilities are being built in India, Singapore and China where some packaging activities are already performed in Shanghai. |
Managing the vaccine supply chain involves anticipating market needs and using a flexible approach to be able to meet fluctuations in demand. These are based on forecasts from the different markets and firm orders from health authorities for mass vaccination campaigns.
Bulk,Production of bulk vaccines, filling and packaging activities are carefully balanced and stockingplanned. Storing of vaccines helps manage short-term increases in demand. Such increases are prompted bycan result from disease outbreaks or increased demand from the public owing toprompted by disease awareness campaigns.
| 26 | GSK Annual Report 2007 |
| REPORT OF THE DIRECTORS | |
| Regulatory environment | |
| Business review | |
| Regulatory environment | |
| GSK operates in a highly regulated environment, encompassing product approval, pricing restrictions, maintenance of intellectual property and environmental, health and safety responsibilities. | |
Regulation – Pharmaceuticals
GSK operates within a highly regulated environment. Regional and country-specific laws and regulations define the data required to show safety and efficacy of pharmaceutical products, as well as govern testing, approval, manufacturing, labelling and marketing of drugs. These regulatory requirements are a major factor in determining whether a marketable product may be successfully developed and the amount of time and expense associated with the development.
In the USA, the FDA continues to seek to encourage innovation in drug development via its Critical Path Initiative and new tools and processes are being pursued to enhance development of safe and effective drugs. GSK and others in the pharmaceutical industry are collaborating with the FDA and National Institutes of Health in a number of these areas, including evaluation of new biomarkers and benefit/risk assessments.
Drug safety remains a primary focus of the FDA and congressional oversight committees and, as in Europe, evaluation of benefit and risk continues to be a paramount consideration for approval of a new drug. New legislation passed in 2007, the FDA Amendments Act, renews the User Fee system for drug reviews and mandates a rigorous FDA review of safety from approval through the post-marketing phase of the product. The legislation also provides the FDA with new tools to require sponsors to complete post-marketing studies and to make labelling changes.
Regulations requiring development of prescription drugs and biologics for paediatric populations were reauthorised by the US Congress in 2007. Similarly in Europe new paediatrics regulation has now been implemented. GSK fully supports the objective of ensuring the development of better medicines for children.
In Europe, pharmaceutical companies and government regulators continue to implement the new medicines legislation introduced at the end of 2005. This involves significant changes to the EU regulatory system, including changes to product approval procedures, post-marketing requirements, manufacturing controls, labelling requirements, pharmacovigilance processes and increased transparency of regulatory processes.
EU regulators are also engaged in ‘Better Regulation’ initiatives to cut red tape and over-regulation of the pharmaceutical industry. GSK welcomes the recognition that unnecessarily burdensome regulatory requirements can damage competitiveness and may negatively impact public health, and is therefore active in supporting these initiatives.
The regulatory environment in the International region continues to evolve. GSK is participating in a number of regional regulatory initiatives, for example in China where proposed changes to the regulatory framework have provided GSK with an opportunity to work directly with the State Food Drug Administration (SFDA). GSK continues to include broader sets of patient populations from the International region in global development programmes in order to increase global patient access to new innovative medicines and optimise regulatory approvals.
Price controls
In many countries the prices of pharmaceutical products are controlled by law. Governments may also influence prices through their control of national healthcare organisations, which may bear a large part of the cost of supplying medicines to consumers.
Recent government healthcare reforms in countries such as France, Spain and Germany may restrict pricing and reimbursement.
In the USA, recent legislative proposals on healthcare reform, cross-border trade, the acceleration of generics to market, and comparative effectiveness have further increased the focus on pricing. Currently, there are no government price controls over private sector purchases, but federal law requires pharmaceutical manufacturers to pay prescribed rebates on certain drugs to be eligible for reimbursement under Medicaid and other state and federal healthcare programmes. For the 2008 Presidential elections healthcare is one of the leading domestic issues. Though prices are part of the discussions, increasingly the leading candidates are proposing health reforms to address chronic disease as the primary healthcare cost driver.
Medicare
From 2006, the US Medicare program, a federally funded healthcare insurance programme benefiting senior citizens and certain disabled Americans, included coverage for prescription medicines. The coverage is voluntary, includes brand-name and generic drugs and is open to the 41 million Americans with Medicare coverage.
A number of competing private organisations provide the benefit with premiums subsidised by the government. Benefits must satisfy a minimum standard outlined in federal law. While the law provides incentives for manufacturers to negotiate prices with private health insurance plans, it does not provide for government price controls. The government provides additional help to more than 14 million people on Medicare with limited incomes and resources. Those qualifying beneficiaries pay no or reduced premiums and deductibles, and low co-payments for their prescriptions.
The benefit has proved to be a marked success. Competition has reduced the estimate of total costs made by the Congressional Budget Office by $387 billion over a ten year period. Recent polls of Medicare beneficiaries enrolled in the new benefit show satisfaction rates of 85-89%.
Value for money
Payers around the world are concerned about the cost of healthcare and the pricing of medicines. The requirement to satisfy healthcare purchasers on value for money is becoming an additional hurdle for product acceptance over and above the regulatory tests of safety, efficacy and quality.
| GSK Annual Report 2007 | 27 |
| REPORT OF THE DIRECTORS | |
| Regulatory environment | |
| Business review | |
| Regulatory environment | |
| continued | |
While it is appropriate for payers to seek value for money when purchasing medicines, this often translates into cost-containment measures that delay patient access to new medicines and make it difficult even for significantly improved therapies to achieve a price that reflects added value. Healthcare budgets could be managed in a more strategic and long-term manner. Focus should shift to value not cost, and pricing should reflect value. Value should be defined broadly. What matters is whether a medicine works and responds to medical and patient needs. If so, it should be rewarded appropriately.
Payers must also allocate their resources efficiently to provide the best health outcomes. Attention should be focused in three areas: prevention, innovation and better management of chronic diseases. As part of this triple solution, innovative medicines and vaccines will play a key role by preventing, or providing better treatments for expensive diseases such as cervical cancer, breast cancer, asthma, Alzheimer’s and diabetes.
It is not possible to predict whether and to what extent, the Group’s business will be affected by future legislative and regulatory developments relating to specific pharmaceutical products or their price.
Regulation – Consumer Healthcare
The consumer healthcare industry is subject to national regulation for the testing, approval, manufacturing, labelling and marketing of products. In many countries, high standards of technical appraisal involve a lengthy approval process before a new product is launched.
National regulatory authorisation is also required to approve the switch of products from prescription to OTC. The requirements include long-term experience of the quality, safety and efficacy of the product in a wide patient population and data to confirm that the relevant condition is both self-limiting and easily diagnosed by the consumer.
Intellectual property
Intellectual property is a key business asset for GSK. The effective legal protection of intellectual property is critical in ensuring a reasonable return on investment in R&D. Intellectual property can be protected by patents, trademarks, registered designs, copyrights and domain name registrations.
Certain markets, including the USA, the EU and Canada also provide a period of regulatory data exclusivity to qualifying drugs which are new chemical entities or which are new formulations or uses of marketed drugs. Manufacturers of generic drugs may, following any period of data exclusivity, launch, or attempt to launch, generic versions of patented drugs prior to normal patent expiry, arguing that the relevant patents are invalid and/or are not infringed by their product. Significant litigation concerning these challenges is summarised in Note 44 to the financial statements, ‘Legal proceedings’.
Patents
GSK’s policy is to seek to obtain patent protection on all protectable inventions discovered or developed through its R&D activities. Patent protection for new active ingredients is available in most significant markets, and protection can also be obtained for example for new pharmaceutical formulations, manufacturing processes, medical uses and special devices for administering products. Patents protecting new active ingredients are generally applied for early in the development process.
Since the term of a patent in most countries is a set period from the filing date, typically 20 years, the effective term depends on how long a product is in development before launch. This leads to a variation in patent term on a product by product basis, although in a number of markets, including the USA and Europe, it is possible in certain circumstances to obtain a partial restoration of patent term to compensate for the length of the development process.
The patent position with respect to the active ingredients in significant products is as follows:
Advair/Seretide. The patent on the specific combination of salmeterol xinafoate and fluticasone propionate is not due to expire until 2010 (USA) and 2013b (Europe). The US Patent has been re-issued by the US Patent and Trademark Office (USPTO)e. Litigation under patents protecting the product is ongoing in certain European marketse. The UK patent has been revoked by the UK courts. Patents on the individual ingredients have expired except the patents on salmeterol xinafoate in the USA (August 2008), France (December 2008), and Italy (2009).
Avandia,Avandametand Avandaryl. The patent on rosiglitazone is not due to expire until 2012a,c (USA) and 2013b (Europe). Patents on the commercial form of the active ingredient rosiglitazone maleate are not due to expire until 2015 (USA) and 2014b (Europe). Litigation challenging the validity of the patents protecting these products in the USAehas been settled on terms allowing for generic entry late in the first quarter 2012e.
Avodart. The patent on dutasteride is not due to expire until 2015a(USA) and 2017b (Europe). Litigation challenging the validity of the patent protecting this product in the USA is ongoinge.
Avamys/Veramyst. The patent on fluticasone furoate is not due to expire until 2021 in the USA and 2022 in Europe.
Boniva. GSK has co-promotion rights under the patent on ibandronate which is not due to expire until 2012a (USA) and 2011b(Europe). Litigation challenging the validity of the patent protecting this product is ongoing in the USAe.
Combivir. The patent on the specific combination of lamivudine and zidovudine is not due to expire until 2012 (USA) and 2013b(Europe). Litigation challenging the validity of the patent protecting the combination is ongoing in the USAe.
Coreg. GSK is the exclusive licensee under the US patent on carvedilol, which expired in 2007a,c.Coreg CR is protected by a formulation patent that is not due to expire in the USA until 2016, and a patent on the active form carvedilol phosphate that is not due to expire until 2023. Litigation challenging the validity of the patent on the active form is ongoing in the USAe.
Epivir. The patent on lamivudine is not due to expire until 2010a,c(USA) and 2011b (Europe).
Imigran/Imitrex. The patent on sumatriptan is not due to expire until 2009c (USA) and has expired in Europe (except Italy (December 2008)). Litigation challenging the validity of the patent protecting this product in the USA has been settled allowing generic entry in the fourth quarter 2008.
Lamictal. The patent on lamotrigine is not due to expire until 2009a,c(USA). Litigation challenging the validity of this patent in the USA has been settled on terms allowing for generic entry of tablet forms in mid-2008. In Europe, the corresponding patent has expired and generic competition exists.
| 28 | GSK Annual Report 2007 |
| REPORT OF THE DIRECTORS | |
| Regulatory environment | |
| Business review | |
| Regulatory environment | |
| continued | |
Levitrad. GSK has co-promotion rights under the US patent on vardenafil, which is not due to expire until 2018.
Lexiva/Telzir. GSK is the exclusive licensee under the patent on fosamprenavir, which is not due to expire until 2017 (USA) and 2019b (Europe).
Lovaza. The formulation of omega-3 acid ethyl esters is protected by a patent that expires in the USA in 2018.
Paxil/Seroxat. The patent on the commercial form of paroxetine has expired and generic competition exists onPaxil instant release (IR) forms in the USA, Europe and other markets. Litigation relating to patents protecting the product is ongoing in the USAe.Paxil CR is protected by a patent issued in June 2007 relating to a delayed and controlled release formulation of paroxetine hydrochloride. Litigation relating to this patent has been settled on terms allowing for generic entry on all strengths ofPaxil CR no later than fourth quarter 2008e.
Requip. The patent on ropinirole expired in 2007a in the USA and is due to expire in November 2008b in Europe. A patent relating to the use of ropinirole in Parkinson’s disease is not due to expire until May 2008 (USA) and 2011b (Europe). Litigation challenging the validity of the Parkinson’s use patent in the USA has been dismissed by the court, and generic entry is not expected until after expiry of the patent in May 2008e.
Serevent. The patent on salmeterol xinafoate expires in August 2008 in the USA. In Europe, the patent has expired, except in France (December 2008b) and Italy (2009b).
Trizivir.The patent on the method of treatment using a combination of lamivudine, zidovudine and abacavir does not expire until 2016 (USA) and 2016 (Europe).
Tykerb/Tyverb. The Patent on lapatinib is not due to expire until 2020ain the USA and 2022b in Europe.
Valtrex.The patent on valaciclovir is not due to expire until 2009a(USA) and 2009b (Europe, except Greece and Spain (August 2008)). Litigation challenging the validity of the patent in the USA has been settled on terms allowing for generic entry in late 2009e.
Wellbutrin SR, Wellbutrin XLand Zyban. The patent on the active ingredient has expired. There is now generic competition for the sustained release (SR) instant release (IR) and 300mg dosage form ofWellbutrin XL in the USA. Litigation in the USA relating to formulation patents coveringWellbutrin XL has been settled on terms allowing generic entry for the 150mg form in 2008. In Europe, regulatory data exclusivity provides protection until 2009 in some markets.
Ziagen.The patent on abacavir is not due to expire until 2012a,c(USA) and 2014b (Europe).
Zofran.The patent on ondansetron has expired in the USA and Europe, (except Italy (November 2008b)). A patent on use in treating emesis has also expired. Generic competition exists in the USA, Europe and other markets.
| a) | Including granted or pending patent term restoration under the Hatch-Waxman Act |
| b) | Including granted or pending extension of term by national or European supplementary protection certificates |
| c) | Including granted or pending extension of term for paediatric exclusivity |
| d) | A registered trademark of Bayer AG |
| e) | See Note 44 to financial statements ‘Legal proceedings’. |
Trademarks
All of GSK’s pharmaceutical products are protected by registered trademarks in major markets. There may be local variations, for example, in the USA the trademarkPaxil is used instead ofSeroxatandAdvair is used instead ofSeretide.
Trademark protection may generally be extended for as long as the trademark is used by renewing it when necessary. GSK’s trademarks on pharmaceutical products are important for maintaining the brand identity of the product upon expiration of the patent.
The Consumer Healthcare trademarks are particularly important, as the business is very brand oriented and many products do not have patent protection.
Responsibility for environment, health and safety
Environment, health and safety (EHS) is a key element of corporate responsibility for the Group and has a high priority. Responsibility for EHS is at the highest level. There is a corporate department reporting to the General Counsel that has overall responsibility for providing governance and leadership on EHS issues. The head of this department makes regular reports to the Corporate Executive Team (CET) and the Audit and Corporate Responsibility Committees of the Board. Within the businesses all executives and managers are responsible for EHS and are supported by site-based EHS and occupational medical staff.
EHS strategy and plan
GSK has a 10-year strategic plan for EHS that extends to 2015 with annual action plans. The plan is aligned with the GSK business drivers and includes management objectives with performance measures and targets. In 2007, GSK’s progress was evaluated against the targets set in 2006.
The focus for 2007 was EHS Stewardship which is about building a sustainable business. It involves caring for the present while thinking to the future in making decisions. This supports all three aspirations in the 2006 to 2015 plan – embedding EHS in the business, environmental sustainability and open and transparent stakeholder relations.
Accomplishments in 2007
| • | Climate change: A comprehensive strategy on climate change and energy efficiency was approved and is available on GSK’s website. A climate change and energy reduction team has been formed to manage a special fund which is used to support climate change projects. The team identified more than 400 projects for 2007 and 2008 to reduce energy consumption and to increase GSK’s use of renewable energy. |
| • | Manufacturing efficiency: In the ongoing effort to improve the efficiency of manufacturing processes and therefore significantly decrease both the purchase of raw materials and the production of waste, GSK has selected the best candidate medicines for improvement. The mass efficiency of processes in development continues to improve and progress is being made to achieve the target to double mass efficiency and thereby halve the waste per unit of product for the manufacturing processes for all phase III compounds by 2010. Late stage products have been evaluated since 2005 for efficiency with an improvement to 2.8% on average. Certain marketed products, with a known market potential, have also been selected for improvement of the efficiency of their manufacturing processes. |
| GSK Annual Report 2007 | 29 |
| REPORT OF THE DIRECTORS | |
| Regulatory environment | |
| Business review | |
| Regulatory environment | |
| continued | |
| • | Workplace chemical exposure:Occupational hygiene measurements have been completed for over 50% of GSK tasks involving exposure to the most potent materials. Most results show that exposures are adequately controlled by the respiratory protective equipment worn, with 9% verified as “respirator free” meaning respiratory protection is not necessary. Immediate action was taken to control exposures in the few instances where levels were found to be higher than predicted. Manufacturing sites have a target of 80% respirator free by the end of 2010. |
| • | Process safety:GSK’s Process Safety Management System is being enhanced, with new engineering standards and training programmes under development. The standards will be used to design new process plant and to upgrade existing plants where needed. The training programmes will increase process safety awareness and competencies for engineers, chemists and managers. |
| • | External stakeholders:In addition to the ongoing UK stakeholder group meeting in March, a panel of US stakeholders met in October to provide input on EHS issues from a US perspective. In a benchmark assessment of environmental programmes, carried out by the UK charity, Business in the Environment, GSK was ranked with the top companies. GSK is also included in both the FTSE 4Good index and the Dow Jones Sustainability Index. |
EHS audits
As part of its governance responsibility, GSK conducts EHS audits of its sites, operating entities and key suppliers, assessing the management of key risks and impacts and performance against GSK’s global EHS standards. This includes providing audited sites with quantitative performance information as well as highlighting areas for risk reduction and improvement. In 2007, 33 operating entities were audited, 17 of these achieved audit scores of 80% or better, which reflects our long term goal to have all of our sites score above 95%. No site scored less than 50% but seven critical findings were raised. These have been corrected. To ensure continuous improvement, progress was monitored on corrective and preventive action plans arising from all audits.
As part of the commitment to corporate responsibility and the pro-active management of the GSK manufacturing and supply base, 55 current and potential suppliers were also assessed. This process evaluated the management of key EHS risks and impacts, including fire and explosion risks, aspects of process safety and loss prevention, control of exposure to hazardous substances and environmental protection as well as core human rights issues, based on the Group’s requirements for suppliers. Recommendations were made for improvements where needed and 75% of the potential suppliers failed to achieve GSK’s recommendations. GSK plans to partner only with the successful candidates to improve their overall environment, health, safety and loss prevention performance.
EHS targets
As part of the EHS plan, targets are set every five years with 2006 as the baseline year for the targets to 2010.
GSK selected its measures of performance improvement based on the potential for adverse impact on people, the environment, business continuity or business reputation.
Most of the measures selected are similar to those reported by other companies and are recommended by the Global Reporting Initiative, a long-term, multi-stakeholder, international undertaking, to develop and disseminate globally applicable sustainability reporting guidelines.
Targets have been set to eliminate chlorofluorocarbons (CFCs) from all uses by 2010 and each year to reduce non-hazardous waste disposed by 1%, reduce water use and volatile organic compound (VOC) releases to air by 2%, reduce pollution of wastewater, measured as chemical oxygen demand, by 3% and reduce energy usage and greenhouse gas emissions by 1%. During the year, a further target was set to reduce energy usage and greenhouse gas emissions by 20% by 2010 and 45% by 2015. All targets are normalised by sales based on a constant exchange rate.
In 2007, GSK remained on track to eliminate the use of CFCs by 2010 and to meet its 2010 targets for energy use and related greenhouse gas emissions. Progress towards the 2010 energy and related greenhouse gas emissions target is expected to accelerate in 2008 and beyond. The annual targets were met for reduction in water use and wastewater pollution. GSK did not meet its targets for non-hazardous waste disposal or VOC releases to air. In the case of non-hazardous waste disposal, this was because there was an 83% increase in solid waste disposal in the vaccines business due to its expansion programme in the development and launch of new vaccines. In the case of VOC releases, this was because, due to product mix changes, solvent recovery equipment at some of the manufacturing sites was inadequate to completely capture and recycle certain solvents used in the manufacturing process.
Final EHS performance data for 2007 with explanations of the trends will be published in the Corporate Responsibility report on GSK’s website.
Sustainability
In working towards sustainability, GSK is addressing the economic, environmental and social issues in research, manufacturing, sales and distribution of its medicines and consumer healthcare and nutritionals products. Sustainability starts with healthcare solutions found by R&D and continues with innovations to improve the efficiency of manufacturing processes for new products. This reduces resource use which in turn lowers waste and cost. With lower cost our productscan be available to a wider population around the world. In the future, the EHS plan for excellence proposes investigating the use of renewable resources in manufacturing.
The Group seeks dialogue with external stakeholders and considers their views when developing approaches to sustainable development. More information on EHS programmes and performance may be found on GSK’s website.
| 30 | GSK Annual Report 2007 |
| REPORT OF THE DIRECTORS | |
| World market | |
| Business review | |
| World market | |
World economy
The global economy continued to be broadly positive during 2007, buoyed by growth in developing markets such as China, although the mortgage-related issues in the USA had an adverse effect in several countries. World Gross Domestic Product (GDP) growth eased from 3.9% in 2006 to 3.6%. The International Monetary Fund forecasts global GDP growth to be 4.1% in 2008.
Equity markets struggled in 2007, against a backdrop of record-breaking oil prices and continued concerns over the situations in Iraq and Afghanistan. Oil prices, which averaged $71 per barrel throughout the year, rose to $100 later in the year. Inflation in the OECD countries was 1.9% but is expected to increase to 2.5% in 2008.
The US economy weakened significantly, led by a slump in new housing starts and exacerbated by the sub-prime lending crisis. GDP growth slowed from 2.9% in 2006 to 2.2% in 2007 and many analysts expect it to fall below the 2% mark during 2008. The Dow Jones Industrial Index gained 6.4% over the period while interest rates dropped by 1% to 4.25% before a significant cut in January 2008 took them down to 3%. In 2007, the US dollar continued to decline against both the Euro and Sterling. Having fallen throughout the year, the US dollar was worth less than 50p in November, its lowest point since 1992.
The Chinese economy continued to make sound progress, growing by 11.3% during 2007. Growth is forecast to dip slightly in 2008, particularly as problems in the USA may impact on demand for Chinese exports. In Japan, GDP was 1.9% and the Nikkei 225 fell by 11.1% during the year, marking its first annual decline in five years. The Indian and Brazilian economies both achieved double-digit growth in 2007.
In the Eurozone, GDP growth slowed from 3.3% in 2006 to 2.7% and is expected to fall to 1.9% in 2008. France expanded by 1.8% in 2007, Germany by 2.5%, the UK by 3.1% and Spain by 3.3% . European Central Bank interest rates closed the year at 4%, up 0.5% on the end of 2006. UK rates started the year at 5%, rose in three steps to 5.75% and fell back to 5.5% at the year-end while the FTSE 100 Index gained just 3.8%, its weakest annual performance since 2003.
Exchange
The currencies that most influence the Group’s results are the US dollar, the Euro and the Japanese Yen.
In 2007, the US dollar fell by 2% against Sterling, to $1.99 at the year-end. The year-end rates for the Euro strengthened by 8% and the Japanese Yen by 5% against Sterling.
World market – pharmaceuticals
Global pharmaceutical sales in 2007 were £329 billion compared with £328 billion in 2006.
| World market by | Value | % of | Growth | |||
| geographic region | £bn | total | £% | |||
| USA | 140.8 | 43 | (3 | ) | ||
| Europe | 97.6 | 30 | 5 | |||
| France | 18.6 | 6 | 5 | |||
| Germany | 17.2 | 5 | 3 | |||
| UK | 11.3 | 3 | 5 | |||
| Italy | 10.3 | 3 | (2 | ) | ||
| Japan | 28.6 | 9 | (9 | ) | ||
| Asia Pacific | 24.6 | 7 | 10 | |||
| Latin America | 16.5 | 5 | 7 | |||
| Middle East, Africa | 12.4 | 4 | 4 | |||
| Canada | 8.3 | 2 | – | |||
| Total | 328.8 | 100 | – | |||
The US market has decreased by 3%, but it still represents 43% of the global prescription pharmaceutical market compared with 30% a decade ago.
At 30th September 2007, GSK held second position in the world pharmaceutical market with a market share of 5.9%, behind Pfizer with a market share of 7%. GSK had four of the world’s top 60 pharmaceutical products. These wereAvandia,Lamictal,Seretide/AdvairandValtrex.
| World market – | Value | % of | Growth | |||
| top six therapeutic classes | £bn | total | £% | |||
| Central nervous system | 54.4 | 17 | 1 | |||
| Cardiovascular | 50.7 | 15 | (6 | ) | ||
| Alimentary tract and metabolic | 39.7 | 12 | (1 | ) | ||
| Antineoplastic/Immunomodulatory | 35.6 | 11 | 8 | |||
| Anti-infectives (bacterial, | 32.9 | 10 | (1 | ) | ||
| viral and fungal) excluding | ||||||
| vaccines | ||||||
| Respiratory | 22.1 | 7 | 2 | |||
(Note: data based on 12 months to 30th September 2007)
| GSK Annual Report 2007 | 31 |
| REPORT OF THE DIRECTORS | |
| Products and competition | |
| Business review | |
| Products | |
Products and competition
Pharmaceutical products
GlaxoSmithKline’s principal pharmaceutical products are presentlycurrently directed to nineeight main therapeutic areas. An analysis of sales by these therapeutic areas, andarea, with a description of the principal products, areis set out below:
2004 | 2003 | 2002 | 2007 | 2006 | 2005 | |||||
| Turnover by therapeutic area | £m | £m | £m | £m | £m | |||||
| Respiratory | 4,415 | 4,417 | 3,987 | 5,032 | 4,995 | 5,054 | ||||
| Central nervous system | 3,463 | 4,455 | 4,511 | 3,348 | 3,642 | 3,219 | ||||
| Anti-virals | 2,360 | 2,349 | 2,299 | 3,028 | 2,827 | 2,598 | ||||
| Anti-bacterials/anti-malarials | 1,561 | 1,815 | 2,210 | |||||||
| Metabolic | 1,253 | 1,079 | 960 | 1,514 | 1,875 | 1,495 | ||||
| Vaccines | 1,196 | 1,123 | 1,080 | 1,993 | 1,692 | 1,389 | ||||
| Cardiovascular and urogenital | 1,554 | 1,636 | 1,331 | |||||||
| Anti-bacterials/anti-malarials | 1,330 | 1,369 | 1,519 | |||||||
| Oncology and emesis | 934 | 1,001 | 977 | 477 | 1,069 | 1,016 | ||||
| Cardiovascular and urogenital | 933 | 771 | 661 | |||||||
| Other | 1,031 | 1,171 | 1,310 | 957 | 973 | 1,040 | ||||
| 17,146 | 18,181 | 17,995 | 19,233 | 20,078 | 18,661 | |||||
Products and all their versionsformulations may not be approved for all indications in all markets where they are available.
Respiratory
Seretide/Advair, a combination ofSereventandFlixotide, offers a long-acting bronchodilator and an anti-inflammatory in a single inhaler. It is approved for the treatment of asthma and COPD.
Flixotide/FloventandBecotide/Becloventare inhaled steroids for the treatment of inflammation associated with asthma and COPD.
Sereventis a long-acting bronchodilator used to treat asthma and COPD, andVentolinis a selective short-acting bronchodilator used to treat bronchospasm.
Veramyst/Avamys, Flixonase/FlonaseandBeconaseare steroid intra-nasal preparations for the treatment of perennial and seasonal rhinitis.
Central nervous system (CNS)
Seroxat/Paxilis a selective serotonin re-uptake inhibitor (SSRI)for the treatment of depression,major depressive disorder, panic, obsessive compulsive disorder, post traumatic stress disorder, social anxiety disorder, premenstrual dysphoric disorder, and generaldisorderand generalised anxiety disorder. A controlled release formulation,Paxil CR, is available in the USA.
Wellbutrinis an anti-depressant, available in the USA and many European and international markets in normal, sustained-release (SR) and once dailyonce-daily (XL) formulations.
Imigran/Imitrexis a 5HT1 receptor agonist used for the treatment of severe or frequent migraine and cluster headache and has become the reference product in this sector.Naramig/Amergeis also a newer migraine product.5HT1 receptor agonist indicated for the treatment of migraine.
Lamictal, a well established treatment for epilepsy, is now also indicated for bipolar disorder.
Requipis a specific dopamine D2/D3 receptor agonist indicated for the treatment of Parkinson’s disease.disease and Restless Legs Syndrome (RLS).
Anti-virals
Combivir, a combination ofRetrovirandEpivir, has consolidated the position of these two reverse transcriptase inhibitors as the cornerstone of many multiple anti-HIV product regimens. Physician acceptance has clearly demonstrated the value placed on minimising the pill burden faced by patients.
Ziagenis a reverse transcriptase inhibitor. The product’s potency, ease of use and resistance profile allow it to play a significant role in a variety of highly active, well tolerated and simplified HIV treatment regimens.
Triziviris a combination ofCombivirandZiagen, combining three anti-HIV therapies in one tablet, for twice dailytwice-daily administration.
Epzicom/Kivexa, approved byfor use in the FDA in August 2004,USA and Europe, is a combination ofEpivirandZiagenthat is taken as one tablet with once-daily dosing for HIV/AIDS in combination with at least one other anti-HIV drug.
Lexiva/Telziris a protease inhibitor for the treatment of HIV that is well tolerated and more convenient thanAgenerase, which it supersedes.Lexivamay be taken twice dailytwice-daily or once dailyonce-daily when boosted with ritonavir.
Zeffixhas been approved for marketing in the USA, Europe, China and other markets for the treatment of chronic hepatitis B.
Valtrexis a treatment for episodic genital herpes as well as the long term suppression and reduction of transmission of genital herpes, zoster (shingles), cold sores and chicken pox.ValtrexsupersedesZovirax, which is also used to treat herpes infections.
Metabolic
Avandia is a potent insulin sensitising agent which acts on the underlying pathophysiology of type 2 diabetes.
Avandamet is a combination ofAvandia and metformin HCI that targets insulin resistance and decreases glucose production in one convenient pill.
Avandaryl/Avaglim is a combination ofAvandia and Amaryl, a Sanofi-Aventis product.Avandaryl/Avaglym targets insulin resistance and stimulates pancreatic insulin production.
Bonviva/Boniva is a long-acting bisphosphonate available in once-monthly oral and quarterly injection forms for the treatment of osteoporosis (co-promoted with Roche).
Vaccines
GSK markets over 30 vaccines worldwide, of which more than half are combination vaccines to protect children, adolescents and/or adults against up to six diseases at the same time.
Infanrix is GSK’s range of paediatric vaccine combinations.Infanrixprovides protection against diphtheria, tetanus and pertussis (whooping cough).Infanrix penta (Europe)/Pediarix (USA, Canada) provides additional protection against hepatitis B and polio.Infanrix hexa adds protection against Haemophilus influenzae type b, which is a cause of meningitis.Boostrix is available to add protection against pertussis (whopping cough) to the routine tetanus/diptheria booster administered to teenagers.
In GSK’s hepatitis vaccines range,Havrix protects against hepatitis A andEngerix-B against hepatitis B.
| 32 | GSK Annual Report 2007 |
| REPORT OF THE DIRECTORS | |
| Products and competition | |
| Business review | |
| Productsandcompetition | |
| continued | |
Twinrix is the only available combined hepatitis A and B vaccine, protecting against both diseases with one vaccine and available in both adult and paediatric strengths. In Europe,FENDrix, a vaccine to prevent hepatitis B in patients with renal insufficiency including high-risk groups such as pre-haemodialysis and haemodialysis patients, is available from 15 years of age onwards.
GSK addedFluviral to its portfolio of products when it acquired the Canadian vaccine manufacturer ID Biomedical Corporation in December 2005.Fluviral is marketed in Canada and, following FDA approval, the USA where it is approvedfor the active immunisation of adults 18 years and older against influenza disease under the brandFluLaval.Fluviral andFluLaval add toFluarix GSK’s seasonal ‘flu vaccine, which is distributed in 79 countries including the USA.
GSK also marketsPriorix, a measles, mumps and rubella vaccine,Typherix, a vaccine for protection against typhoid fever, andVarilrix, a vaccine against varicella or chicken pox.Priorix-Tetra, GSK’s new combination vaccine to prevent measles, mumps, rubella and varicella (MMRV) was first launched in Germany in August 2006. In addition, the Group markets a range of vaccines to prevent meningitis under the umbrella nameMencevax. GSK’s new Hib-MenC vaccine,Menitorixis now available in the UK. GSK’s meningitis vaccine portfolio will be complemented by new meningitis conjugate vaccines in the near future.
As part of its paediatric franchise, GSK continued to roll out the launch of its vaccine against rotavirus induced gastroenteritis,Rotarix, which is now launched in 90 countries worldwide. Rotavirus vaccination has been included in the national vaccination calendar of five Latin American countries whereRotarix will be available free at public health clinics, as part of governmental paediatric immunisation programmes.
Cardiovascular and urogenital
Coreg is an alpha/beta blocker which has been proven to be effective in treating patients with mild, moderate and severe heart failure, heart attack or hypertension. GSK has sole marketing rights in the USA and Canada. A controlled release formulation,Coreg CR is also available in the USA. Generic versions ofCoreg are available in the USA and Canada.
Levitra is a PDE-5 inhibitor indicated for male erectile dysfunction. GSK has co-promotion rights in the USA and more than 20 other markets.
Avodart is a 5-ARI inhibitor currently indicated for benign prostatic hyperplasia. A large clinical study is underway examining its efficacy in reducing the risk of prostate cancer.
Vesicareis an anti-muscarinic indicated for overactive bladder. GSK has co-promotion rights with Astellas in the USA. Its major competitors are Detrol LA, Ditropan XL/generic oxybutynin, and Enablex.
Arixtra, a selective Factor Xa inhibitor, is indicated for the treatment of deep vein thrombosis (DVT) and pulmonary embolism (PE) and for the prevention of DVT and PE in patients undergoing major orthopaedic surgery, abdominal surgery and acutely ill medical patients (EU only). Also in the EU,Arixtra is indicated for the treatment of patients with acute coronary (unstable angina, NSTEMI and STEMI).
Fraxiparine is a low-molecular weight heparin indicated for prophylaxis of thromboembolic disorders (particularly deep vein thrombosis and pulmonary embolism) in general surgery and in orthopedic surgery, treatment of deep vein thrombosis and prevention of clotting during haemodialysis.
Integrilin is a GP IIb-IIIa inhibitor, approved in the EU for the prevention of early myocardial infarction in patients with unstable angina or non-Q-wave MI.
Anti-bacterials and anti-malarials
Augmentinis a broad-spectrum antibiotic suitable for the treatment of a wide range of common bacterial infections and is particularly effective against respiratory tract infections.Augmentin ES-600is an extra strength suspension specifically designed to treat children with recurrent or persistent middle ear infections.Augmentin XRis an extra strength tablet formextended release formulation for adults to combat difficult to treat infections.the treatment of patients with community acquired pneumonia or acute bacterial sinusitis.
Altabax/Altargo, approved in 2007 for the topical treatment of certain bacterial skin infections, represents the first new class of topical antibiotics approved by the FDA in nearly two decades. Altabax/Altargo co
Ceftin/Zinnatis an oral antibiotic used primarily for community-acquired infections of the lower respiratory tract.
Malaroneis an oral anti-malarial used for the treatment and prophylaxis of malaria caused by Plasmodium falciparum.
Oncology and emesisLapdap Tykerbis an effectiveoral treatment for patients with advanced or metastatic breast cancer whose tumours overexpress HER2 and well toleratedwho have received prior therapy for the treatment of malaria, which has been developed throughincluding an anthracycline, a public/private collaboration.
Products and competition continued
Metabolic
taxaneand trastuzumab.Avandia Tykerbis a potent insulin sensitising agent which acts on the underlying pathophysiology of type 2 diabetes.
Avandamet is a combination of Avandia and metformin HCI; it is the first medicine that targets insulin resistance and decreases glucose production in one convenient pill.
Avandaryl, a fixed-dosed combination of Avandia, and Amaryl, a Sanofi-Aventis product, was approved in Canadathe USA in October 2004. An FDA approvable letter was received in 2004. GlaxoSmithKline2007 and is working with the FDA to bring about a resolution of the outstanding issues.
VaccinesGlaxoSmithKline markets a range of hepatitis vaccines. Havrix protects against hepatitis A and Engerix-B against hepatitis B.submitted for European approval.
Twinrix Hycamtinis a combined hepatitis Asecond line treatment for ovarian, cervical and B vaccine, protecting against both diseases with one vaccine and available in both adult and paediatric strengths.small cell lung cancer.
Infanrix Bexxaris a range of paediatric vaccine combinations. Infanrix provides protection against diphtheria, tetanustreatment for patients with CD20 follicular, non-Hodgkin’s lymphoma with and pertussis (whooping cough). Infanrix PeNta/Pediarix provides additional protection against hepatitis Bwithout transformation whose disease is refractory to rituximab and polio, and Infanrix hexa further adds protection against haemophilus influenzae type b, which causes meningitis.who have relapsed following chemotherapy.
GlaxoSmithKline also markets PriorixArranon, (nelarabine) a measles, mumpstreatment for patients with T-cell acute lymphoblastic leukaemia and rubella vaccine, Typherix, a vaccine for protection against typhoid fever, and Varilrix, a vaccine against varicella or chicken pox. In addition, the Group markets a range of vaccines to prevent meningitis under the umbrella name Mencevax.T-cell lymphoblastic lymphoma.
Oncology and emesis
Zofranis used to prevent nausea and vomiting associated with chemotherapy and radiotherapy for cancer, and is available in both oral and injectable forms. It is also approved for use in the prevention and treatment of post-operative nausea and vomiting.
Hycamtin Otheris a second line treatment both for ovarian cancer and for small cell lung cancer.
Bexxar is a treatment for patients with CD20 follicular, non-Hodgkin’s lymphoma with and without transformation whose disease is refractory to rituximab and who have relapsed following chemotherapy.
Cardiovascular and urogenitalCoreg is an alpha/beta blocker which has been proven to be effective in treating patients with mild, moderate and severe heart failure, heart attack or hypertension. GlaxoSmithKline has sole marketing rights in the USA and Canada. Generic versions of the product are available in Canada.
Levitra is a PDE-5 inhibitor indicated for male erectile dysfunction. GlaxoSmithKline has co-promotion rights in the USA and more than 20 other markets .
Avodart is a 5-ARI inhibitor currently indicated for benign prostatic hyperplasia. A large clinical outcome study is underway examining its efficacy in the prevention of prostate cancer.
Arixtra and Fraxiparine were acquired in 2004 as part of the divestitures required for the merger of Sanofi and Aventis.
Arixtra, a selective Factor Xa inhibitor, is indicated for the prophylaxis of deep vein thrombosis, which may lead to pulmonary embolism, in hip fracture surgery, knee replacement and hip replacement surgery. It is also indicated for the treatment of deep vein thrombosis and pulmonary embolism.
Fraxiparine is a low-molecular weight heparin indicated for prophylaxis of thromboembolic disorders (particularly deep vein thrombosis and pulmonary embolism) in general surgery and in orthopedic surgery, treatment of deep vein thrombosis and prevention of clotting during hemodialysis.
The European marketing rights to Integrilin were acquired in 2004. A GP IIb-IIIa inhibitor, it is approved in the EU for the prevention of early myocardial infarction.
Other
This category includesBetnovate, the higher potencyDermovateand the newerCutivate, which are topical anti-inflammatory steroid products used to treat skin diseases such as eczema and psoriasis,Relafen, a non-steroidal anti-inflammatory drug for the treatment of arthritis, andZantac, for the treatment of peptic ulcer disease and a range of gastric acid related disorders.
| GSK Annual Report 2007 | 33 |
| REPORT OF THE DIRECTORS | |
| Products and competition | |
| Business review | |
| Products | |
Pharmaceuticals competition
The pharmaceutical industry is highly competitive. GlaxoSmithKline’sGSK’s principal competitors arerange from small to large international pharmaceutical companies often with substantial resources. Some of these companies and their major products are mentioned below.
Pharmaceuticals may be subject to competition from other products during the period of patent protection and, once off patent, from generic versions. The manufacturers of generic products typically do not bear significant research and development or education and marketing development costs and consequently are able to offer their products at considerably lower prices than the branded competitors. A research and development based pharmaceutical company will normally seek to achieve a sufficiently high profit margin and sales volume during the period of patent protection to repay the original investment, which is generally substantial, and to fund research for the future. Competition from generic products generally occurs as patents in major markets expire. Increasingly patent challenges are made prior to patent expiry, claiming that the innovator patent is not valid and/or that it is not infringed by the generic product. Following the loss of patent protection, generic products rapidly capture a large share of the market, particularly in the USA.
GlaxoSmithKlineGSK believes that remaining competitive is dependent upon the discovery and development of new products, together with effective marketing of existing products. Within the pharmaceutical industry, the introduction of new products and processes by competitors may affect pricing levels or result in changing patterns of product use. There can be no assurance that products maywill not become outmoded, notwithstanding patent or trade marktrademark protection. In addition, increased government and other pressures for physicians and patients to use generic pharmaceuticals, rather than brand-name medicines, may increase competition for products that are no longer protected by patent.
RespiratoryGlaxoSmithKline’sGSK’s respiratory franchise is driven by the growth ofSeretide/Advair, gaining patients from competitor products and the cannibalisation of Serevent and Flixotide/Flovent. Major respiratory competitors are Singulair from Merck, especially in the USA, and in Europe, Symbicort from AstraZeneca and Spiriva from Pfizer/Boehringer Ingelheim.
CNS disorders
Major competitors in the USA toPaxilare its generic forms, as well as generic fluoxetine, the generic form of Eli Lilly’s Prozac, generic sertraline, the generic form of Pfizer’s Zoloft, Cymbalta from Pfizer,Eli Lilly, Forest Laboratories’ Celexa and Lexapro.Lexapro, and Effexor XR from Wyeth. The principal competitors in the USA forWellbutrinare generic forms of bupropion, the generic forms of SSRIs, andLexapro, Effexor XR, a Wyeth product. Paxil CR and the once-daily Wellbutrin XL help to retain a strong presence in the anti-depressant market, given the availability of generic paroxetine in the USA.Cymbalta. Generic competition forSeroxat/Paxilhas also commencedoccurred in the UK and a number of other markets.
The major competitors forLamictalin epilepsy are J&J’s Dilantin and generic phenytoin, Novartis’ egretol/Tegretol XR and generic carbamazepine. UCB’s Keppra and Abbot’s Depakote/Depakote ER. In bipolar the major competitors are generic lithium, other anti-epileptics including Abbott’s Depakote/Depakote ER and the atypical anti-psychotics including AstraZeneca’s Seroquel. The major competitors forImitrex/Imigran are AstraZeneca’s Zomig, Merck’s Maxalt and Pfizer’s Relpax.
Anti-virals
GSK is a pioneer in the HIV market, launching AZT (Retrovir)in 1987 andEpivir in 1995, which today are available asCombivir in a single tablet, a cornerstone of HIV combination therapy. The launches of Ziagen,Agenerase,Trizivir,Lexiva andEpzicom have broadened the Group’s portfolio of HIV products. Major competitors in the HIV market include Gilead, Bristol Myers Squibb, Abbott, MerckRoche and Pfizer.
GlaxoSmithKline has a pioneering role in the HIV market, with Retrovir and Epivir acting as the cornerstone of combination therapy and available as Combivir in a single tablet. The launches of Ziagen, Agenerase, Trizivir, Lexiva and Epizcom have broadened the Group’s portfolio of HIV products.Boehringer Ingelheim.
Valtrexhas strengthened the Group’s position in the anti-herpes area. area, where GSK’sValtrex andZovirax compete with Novartis’ Famvir.Valtrex is a market leader, whilstZoviraxfaces competition from generic aciclovir. Both Valtrex and Zovirax compete with Novartis’ Famvir. acyclovir. In the hepatitis B market, GSK’sZeffixwas the first anti-viral on the market to treat hepatitis B.market. Gilead’s Hepsera was the second. GlaxoSmithKlineThe Group has secured marketing rights toHepserain some key markets.
Metabolic
The major competitor forAvandia is Takeda Chemical’s Actos, whose co-promotion with Eli Lilly in the USA ended in 2007. Takeda also market Actoplusmet/Competact (a combination of metformin HCI and Actos) in the USA and some EU markets and DuetAct (a combination of glimepiride and Actos) in the USA.
MonthlyBoniva/Bonviva competes with Merck’s weekly Fosamax and Proctor & Gamble/Sanofi-Aventis’ twice-monthly Actonel, and Novartis’ Reclast/Aclasta which is dosed as an annual infusion. Generic Fosamax (alendronate) is now available in many markets, including the USA, UK, Germany and Canada.
Vaccines
The vaccine market is dominated by five key players. GSK’s major competitors are SanofiPasteur (SP), Merck, Novartis and Wyeth. Within the paediatric vaccine field,Infanrix’s main competitor is SP’s range of DTPa-based combination vaccines, although theInfanrix hexacombination is the only available hexavalent paediatric combination in Europe. Merck and the joint venture between Merck and SP in Europe market two new vaccines against rotavirus induced infection and HPV, that respectively compete againstRotarix andCervarix.
Cardiovascular and urogenital
GSK marketsCoreg in the USA where its major competitors are Toprol XL and generic betablockers.Avodart competes directly with Merck’s Proscar within the BPH (enlarged prostate) market. The Group has co-promotion rights in the USA forLevitra, which faces competition from Pfizer’s Viagra and Lilly’s Cialis. The major competitor forArixtra is the low molecular weight heparin enoxaparin, a product marketed by Sanofi-Aventis.
Anti-bacterials and anti-malarials
Generic versions of bothAugmentinandCeftin/Zinnatare available in the USA.Augmentinhas also lost patent protectionfaces generic competition in various countries in Europe. European countries.Augmentin XRandAugmentin EScompete against a broad range of other branded and generic antibiotics.MalaroneMalarone’s’s safety profile and convenient dosing regimen have helped put this product in a strong position versus mefloquine for malaria prophylaxis.
MetabolicThe major competitor for Avandia is Takeda Chemical’s Actos, which is co-promoted with Eli LillyAltabax/Altargo competes in the USA.topical antibiotic market against a number of generic competitors, including generic mupirocin and fusidic acid. Altabax/Altargo’s offers less frequent and shorter duration of therapy and lack of cross resistance to other established classes of anti-bacterials.
| 34 | GSK Annual Report 2007 |
| REPORT OF THE DIRECTORS | |
| Productsand competition | |
| Business review | |
| Products and competition | |
| continued | |
VaccinesOncology and emesisGlaxoSmithKline’s majorMajor competitors in the vaccinediverse therapeutic market include Sanofi Pasteur (SP), MerckRoche/ Genentech, Novartis, Sanofi-Aventis and Wyeth. Bristol Myers Squibb. GSK’s therapeutic portfolio led by the recently approvedEngerix-B TykerbandHavrix Hycamtincompete with vaccines produced by SP and Merck – Comvax and Recombivax HB for hepatitis B, and Vaqta and Avaxim for hepatitis A. Infanrix’s major competitor is SP’s range of DTPa-based combination vaccines., currently holds a relatively small market position.
Oncology and emesis
Zofranpresently provides GlaxoSmithKlineprovided GSK with a leadership position in the anti-emetic market where competitor companies include Roche, Sanofi-AventisMGI and more recently Merck. MajorGeneric competitors became available late in the diverse cytotoxic market include Bristol Myers Squibb, Sanofi-Aventis, Pfizer and Novartis. GlaxoSmithKline’s cytotoxic portfolio, led by Hycamtin and Navelbine, currently holds a relatively small market position.2006.
Cardiovascular and urogenitalGlaxoSmithKline markets Coreg in the USA where its major competitors are Toprol XL and generic betablockers. Avodart competes directly with Merck’s Proscar within the BPH market. GlaxoSmithKline has co-promotion rights in the USA and over 20 other countries for Levitra, which faces competition from Pfizer’s Viagra and Lilly/Icos’ Cialis.
Products and competition continued
Consumer Healthcare products
GlaxoSmithKline’s principal consumer healthcare products are in three major areas. An analysis of sales by these areas is set out below:
| 2004 | 2003 | 2002 | ||||
| £m | £m | £m | ||||
| OTC medicines | 1,489 | 1,556 | 1,586 | |||
| Oral care | 1,088 | 1,082 | 1,052 | |||
| Nutritional healthcare | 636 | 622 | 579 | |||
| 3,213 | 3,260 | 3,217 | ||||
In 2004 sales were three per cent higher in CER terms than in 2003 but declined one per cent in sterling terms.
| 2007 | 2006 | 2005 | ||
| £m | £m | £m | ||
| OTC medicines | 1,718 | 1,496 | 1,437 | |
| Oral care | 1,049 | 993 | 943 | |
| Nutritional healthcare | 716 | 658 | 619 | |
| 3,483 | 3,147 | 2,999 | ||
Major products, which are not necessarily sold in all markets, are:
| Category | Product | |
| Over-the-counter medicines | ||
| Analgesics | Panadol | |
| Dermatologicals | Zovirax | |
| Abreva | ||
| External nasal dilators | Breathe Right | |
| Gastro-intestinal | Tums | |
| Citrucel | ||
| Respiratory tract | Contac | |
| Beechams | ||
| Smoking control | Commit | |
| Nicorette | ||
| NicoDerm CQ | ||
| NiQuitin CQ | ||
| Nicabate CQ | ||
| Natural wellness support | Abtei | |
| FiberChoice | ||
| Weight control | alli | |
| Oral | Aquafresh | |
| Dr Best | ||
| Macleans | ||
| Odol | ||
| Polident | ||
| Poligrip | ||
| Sensodyne | ||
| Nutritional healthcare | Lucozade | |
| Ribena | ||
| Horlicks | ||
Over-the-counter medicines
The leading products arePanadol, a widely available paracetamol/acetominophen analgesic; acetaminophen analgesic,Nicorettegum in the USA;USA, theNicoDerm,NiQuitin CQandNicabaterange of smoking control products; products,Tums, a calcium-based antacid; antacid,Citrucellaxative; laxative,Contacfor the treatment of colds; colds,Abtei, a natural medicines and vitamin range;range, andZoviraxandAbrevafor the treatment of cold sores. In 2004,Recent additions to the Group obtainedportfolio includeBreathe Right nasal strips that gently lift open nasal passages to provide better breathing, andFiberChoice daily fibre supplements, through the OTC marketing rights toacquisition of CNS, Inc. in 2006, and the switch of orlistat from prescription-only status in the USA, an FDA approved prescriptionUnited States to over-the-counter, marketed as the weight control product, for obesity management, marketed by Roche as Xenical.alli.
Oral care
The leading Oral care products are toothpastes and mouthwashes under theAquafresh,Odol,SensodyneandMacleansand Odol brand names, and a range of toothbrushes sold under theAquafresh, andDr Bestnames. In addition, denture care products are available principally under thePolident,PoligripandCoregabrand names.
Nutritional healthcare
The leading products in this category areLucozadeglucose energy and sports drinks,Ribena, a blackcurrant juice-based drink, rich in vitamin C, andHorlicks, a range of milk-based malted food and chocolate drinks.
Consumer Healthcare competition
GlaxoSmithKlineGSK holds leading global positions in all its key consumer product areas. Worldwide it is the secondthird largest in Oral care and the third largest in OTC medicines. In Nutritional healthcare it holds the leading position in the UK, India and Ireland.
The main competitors includeenvironment in which the major international companies Colgate-Palmolive, Johnson & Johnson, Pfizer, Procter & Gamble, Unilever and Wyeth. In addition, there are many other companies that compete with GlaxoSmithKline in certain markets.
The major competitor products in OTC medicines are:Consumer Healthcare business operates has become ever more challenging:
| • | consumers are demanding better quality, better value and improved performance |
| • | retailers have consolidated and globalised which has strengthened their negotiation power |
| • | manufacturers are consolidating, leading to more aggressive competition across all elements of the marketing mix |
| • | cycle times for innovation have reduced. |
| The main competitors include the major international companiesColgate-Palmolive, Johnson & Johnson, Procter & Gamble, Unileverand Wyeth. In addition, there are many other companies thatcompete with GSK in certain markets. | |
| The major competitor products in OTC medicines are: | |
| • | in the USA: Metamucil (laxative), Pepcid (indigestion) and private label smoking control products |
| • | in the UK: Lemsip (cold remedy), Nurofen and Anadin (analgesics), and Nicorette and Nicotinell (smoking control treatments). |
In Oral care the major competitors are Colgate-Palmolive’s Colgate and Procter & Gamble’s Crest.
In Nutritional healthcare the major competitors toHorlicksare Ovaltine and Milo malted food and chocolate drinks. The competitors toRibenaare primarily local fruit juice products, whileLucozadecompetes with other energy drinks.
Regulatory environment
Regulation – Pharmaceuticals
GlaxoSmithKline operates within a highly regulated environment. Regional and country-specific laws and regulations define the data required to show safety and efficacy of pharmaceutical products, as well as govern testing, approval, manufacturing, labelling and marketing of drugs. These regulatory requirements are a major factor in determining whether a marketable product may be successfully developed and the amount of time and expense associated with this development.
Regulation processIn 2004 GlaxoSmithKline adopted the Common Technical Document format for marketing applications and major supplements. This is a single format for registering a product that is accepted by regulatory authorities in many regions. These applications are being prepared and submitted electronically.
Other harmonisation activities at a global and regional level are ongoing with some success at standardisation. However, the regulatory environment is varied and changes rapidly. The national regulatory authorities in many jurisdictions have high standards of technical appraisal and consequently the introduction of new pharmaceutical products generally entails a lengthy approval process.
In the European Union, there are currently two procedures for obtaining marketing authorisations for medicinal products:
New EU legislation is to be implemented by the end of 2005, which will improve the Centralised Procedure and increase the range of products for which it is compulsory. The Mutual Recognition Procedure (the decentralised procedure), which is intended to facilitate agreement between the member states, will also be amended. The implementation of the new legislation will bring with it a number of other changes, for example, increased post marketing safety monitoring and new types of conditional product approvals.
Grant of a marketing authorisation affords the Group a protection period during which a competitor cannot rely on confidential data in the regulatory file as a basis for its own marketing authorisation. The new EU legislation will, for the first time, harmonise the data protection period for both submission routes.
The FDA has introduced a new focus called the Critical Path Initiative. This is intended to enable innovation in drug development, hopefully allowing for more rapid development and approval of needed medicines. This initiative will investigate the use of pharmacogenomics and surrogate markers of efficacy, among other things, such as manufacturing innovations, as tools for rapidly developing and producing safe and effective drugs for unmet medical needs.
Across International markets, countries outside the USA and Europe, the regulatory environment continues to be extremely varied and challenging. GlaxoSmithKline anticipates that the introduction of new products will continue to require substantial effort, time and expense to comply with regulatory requirements.
Price controlsIn many countries the prices of pharmaceutical products are controlled by law. Governments may also influence prices through their control of national healthcare organisations, which may bear a large part of the cost of supplying products to consumers. Recent Government healthcare reforms in countries such as France, Spain and Germany may restrict pricing and reimbursement.
In the USA, recent legislation on healthcare reform, cross-border trade, the acceleration of generics to market and increased patient contributions have further increased the focus on pricing. Currently there are no government price controls over private sector purchases, but federal legislation requires pharmaceutical manufacturers to pay prescribed rebates on certain drugs in order to be eligible for reimbursement under Medicaid and other federal healthcare programmes.
MedicareThe US Medicare Prescription Drug Improvement and Modernization Act of 2003 provides limited immediate benefits to Medicare patients – the disabled and those over 65 years old – in the form of government sponsored discount cards to be replaced with a comprehensive out-patient drug benefit in 2006. The benefit is intended to be administered by a number of private organisations that will construct benefit structures consistent with federal law and will market the benefit to Medicare patients.
While the law provides strong incentives for manufacturers to negotiate prices with plan sponsors, the bill does not provide for explicit government price controls. As most senior citizens already have some drug coverage, the greatest increase in demand is likely to be in the population of low-income senior citizens who have no coverage. Those low-income senior citizens will receive subsidies for the premiums, deductible and co-payments associated with the comprehensive benefit.
This law also changes the way that drugs administered in surgeries, clinics and hospital outpatient departments will be reimbursed. Instead of reimbursement based on prices published by independent pricing services, doctor and clinic reimbursement will be based on actual market prices as reported by manufacturers and audited by the government. The formula used for hospital outpatient reimbursement will not change in 2005, but the US Government is directed to devise a new, cost-based methodology for 2006 and beyond.
Regulatory environment continued
Value for moneyIt is becoming increasingly necessary to demonstrate the value for money of new products, in particular the impact on drug budget expenditure and the burden of the disease that will be treated.
In some markets, the need to satisfy healthcare purchasers as to value for money is becoming an additional hurdle for product acceptance over and above the regulatory tests of safety, efficacy and quality. This can delay bringing effective and improved medicines to the market and reduce their effective patent protection time.
In many markets, especially in the USA and Europe, it is becoming increasingly difficult for even a significantly improved therapy to obtain a premium price over existing medication. Value-based pricing may be difficult to apply in such circumstances, although in the USA it is still possible to price products to reflect their value. It is not possible to predict whether, and to what extent, the Group’s business may be affected by future legislative and regulatory developments relating to specific pharmaceutical products or their price.
Regulation – Consumer Healthcare
The consumer healthcare industry is subject to national regulation for the testing, approval, manufacturing, labelling and marketing of products. In many countries, high standards of technical appraisal entail a lengthy approval process before a new product is launched.
National regulatory authorisation is also required to approve the switch of products from prescription to OTC. The requirements include long-term experience of the quality, safety and efficacy of the product in a wide patient population and data to confirm that the relevant condition is both self-limiting and easily diagnosed by the consumer.
Intellectual property
Intellectual property is a key business asset for GlaxoSmithKline. The effective legal protection of intellectual property is critical in ensuring a reasonable return on investment in R&D. Intellectual property can be protected by patents, trade marks, registered designs, copyrights and domain name registrations. Patent and trade mark rights are regarded as particularly valuable.
In many cases generic manufacturers launch, or attempt to launch, generic versions of patented drugs prior to normal patent expiry, arguing that the relevant patents are invalid and/or are not infringed by their product. Significant litigation concerning these challenges is summarised in Note 30 to the Financial statements, ‘Legal proceedings’.
PatentsGlaxoSmithKline’s policy is to obtain patent protection on all significant products discovered or developed through its R&D activities. Patent protection for new active ingredients is available in all significant markets. Protection can also be obtained for new pharmaceutical formulations and manufacturing processes, and for new medical uses and special devices for administering products.
The basic patent position with respect to significant products is as follows:
Augmentin. The patent on the key active ingredient, potassium clavulanate has expired in all markets except Italy (2006b) and generic competition exists in most markets.
Avandia and Avandamet. The patent on the active ingredient rosiglitazone is not due to expire until 2012a,c in the USA and 2013b in Europe. Patents on the commercial form of the active ingredient rosiglitazone maleate are not due to expire until 2015 in the USA and 2014b in Europe. Litigation challenging the validity of the patents protecting these products is ongoing in the USAe.
Avodart. The patent on the active ingredient dutasteride has a normal expiry of 2015a in the USA and 2017b in Europe.
Combivir. The patent on the specific combination of lamivudine and zidovudine is not due to expire until 2012 in the USA and 2013b in Europe.
Coreg. GlaxoSmithKline is the exclusive licensee under the US patent on the active ingredient carvedilol, which is not due to expire until 2007a.
Epivir. The patent on the active ingredient lamivudine is not due to expire until 2010a,c in the USA and 2011b in Europe.
Flixotide/Flovent and Flixonase/Flonase. In the USA, the patent on the active ingredient fluticasone propionate expired in May 2004. In most European countries protection expires in March 2005b.
Imigran/Imitrex. The patent on the active ingredient sumatriptan is not due to expire until 2009c in the USA and 2006b in Europe (2008b Italy). Litigation challenging the validity of the patent protecting this product is ongoing in the USAe.
Lamictal. The patent on the active ingredient lamotrigine is not due to expire until 2009a,c (paediatric extension pending) in the USA and 2005b in most countries in Europe. Litigation challenging the validity of this patent in the USA has recently been settlede.
Levitrad. GlaxoSmithKline has co-promotion rights under the US patent on the active ingredient vardenafil which is not due to expire until 2018 in the USA.
Lexiva/Telzir. GlaxoSmithKline is the exclusive licensee under the patent on the active ingredient fosamprenavir, which is not due to expire until 2017 in the USA and 2019b in Europe.
Paxil/Seroxat. The patent on the commercial form of the active ingredient paroxetine is not due to expire until 2007c in the USA and 2006 in Europe. Litigation relating to the validity and infringement of the patents protecting this product is ongoing in the USAe. Generic competition has commenced in the USA, Europe and certain other markets. Paxil CR is protected by a formulation patent that is not due to expire until 2012.
Retrovir. There are no patents on the active ingredient zidovudine. Patents covering pharmaceutical formulations containing zidovudine and their medical use are not due to expire until 2005 in the USA and 2006 in Europe.
Seretide/Advair. The patent on the specific combination of active ingredients salmeterol xinafoate and fluticasone propionate is not due to expire until 2010 in the USA and 2013b in Europe. An application for re-issue of the US patent has been filed by GlaxoSmithKlinee. The UK patent has been revoked by the UK courts. Patents on the individual ingredients do not expire in the UK until 2005. In the USA, the patent on salmeterol xinafoate does not expire until 2008.
Serevent. The patent on the active ingredient salmeterol xinafoate is not due to expire until 2005b in most of Europe (2008b in France and 2009b in Italy) and until 2008 in the USA.
Trizivir. The patent on the specific combination of lamivudine, zidovudine and abacavir is not due to expire until 2016 in the USA and 2016 in Europe.
Valtrex. The patent on the active ingredient valaciclovir is not due to expire until 2009a in the USA and 2009b in Europe. Litigation challenging the validity of the patent protecting this product is ongoing in the USAe.
Wellbutrin SR, Wellbutrin XL and Zyban. The patent on the active ingredient has expired. There is now generic competition for the SR and instant release (IR) forms in the USA. In Europe, regulatory data exclusively provides protection until at least 2005, and until 2009 in some markets. In the USA, Wellbutrin XL is protected by two formulation patents that are not due to expire until 2018. Litigation relating to the validity and infringement of one of these patents is ongoing in the USAe.
Ziagen. The patent on the active ingredient abacavir is not due to expire until 2012a,c in the USA and 2014b in Europe.
Zofran. The patent on the active ingredient ondansetron is not due to expire until 2005c in the USA and 2005b in Europe, (2007b France and 2010b Italy). Patents on use in treating emesis expire in 2006. Litigation challenging the validity of the emesis use patent is ongoing in the USAe.
Trade marks
All of GlaxoSmithKline’s pharmaceutical products are protected by registered trade marks in major markets. In general, the same mark is used for a product in each market around the world, but there may be local variations. For example in the USA the trade mark Paxil is used instead of Seroxat and Advair is used instead ofSeretide.
Trade mark protection may generally be extended for as long as the trade mark is used by renewing it when necessary. GlaxoSmithKline’s trade marks on pharmaceutical products generally assume an increasing importance when the patent for that product has expired in a particular country and generic versions of the product become available.
The Consumer Healthcare trade marks are particularly important, as the business is very brand orientated and many products do not have patent protection.
Responsibility for environment, health and safety
Environment, health and safety (EHS) is a key element of corporate responsibility for the Group and has a high priority. Responsibility for EHS is at the highest level. There is a corporate group reporting to the General Counsel that has overall responsibility for providing governance and leadership on EHS issues. The head of this group makes regular reports to the Corporate Executive Team (CET) and the Audit and Corporate Responsibility Committees of the Board of Directors. Within the businesses, operations managers are responsible for EHS and are supported by site-based EHS and occupational health professionals.
EHS strategy
GlaxoSmithKline has a ten-year strategic plan for managing EHS and sustainability throughout the business, the EHS Plan for Excellence. It is aligned with the Group’s strategy and each year has a special focus. In 2004, the theme was on responding to external challenges. At the same time continued focus on themes from previous years continues to drive improvements in programmes in key risk areas.
Responding to external challenges
Society expects GlaxoSmithKline to take responsibility for the environmental impact of its products as well as those from its operations. The focus of attention has expanded from production to products and environmental impact that can arise at any stage in the product life cycle. The theme of the EHS Plan for Excellence in 2004, responding to external challenges, focused on three key areas: pharmaceuticals in the environment; chemicals policy; and climate change.
Completing core programmes
The EHS Plan for Excellence in 2005 will focus on completing core programmes measured by improved audit scores and by achievement of the performance targets that were set in 2001.
Business drivers and EHS
New product development
Product stewardship and environmental aspects of sustainable development principles have been introduced into all aspects of new product development. The entire life cycle impact of the product is considered in order to address adverse impacts, to optimise resources consumed and to reduce waste produced. Alternative chemistries and processes are reviewed to build safety into the processes and to improve mass productivity, which not only optimises resource consumption and waste generation but also addresses triple bottom line considerations.
Product commercialisation
EHS helps to speed products to market by addressing regulatory concerns during their development. By incorporating EHS in decision-making on design, packaging and labelling, it is possible to reduce costs, differentiate products and extend product life.
Regulatory environment continued
Global competitor
Competitive advantage may be gained by improving public trust based on applying best business processes globally and fostering a culture of continuous improvement. By optimising processes and making them more economically viable, potential is created for lowering the price of medicines which can contribute to the social benefit of allowing greater access to global markets.
GlaxoSmithKline people
Many of the EHS programmes are focused on protecting people. GlaxoSmithKline is committed to working towards designing a workplace that minimises work-related risks to safety and health and provides a shirt-sleeve environment, so that personal safety equipment will not be required on a routine basis to protect employees’ health in laboratory or manufacturing operations.
EHS management
GlaxoSmithKline takes a systematic approach to managing EHS risks and impacts. A framework of information and programmes based on the global EHS standards guides the management of key aspects, impacts and risks throughout the organisation.
EHS audits
As part of its governance responsibility, GlaxoSmithKline conducts EHS audits of its sites, assessing performance against the EHS standards and assigning quantitative performance scores. In 2004, 33 sites were audited. As part of the continuous improvement process, progress was monitored on actions arising from issues raised on all audits.
As part of the commitment to corporate social responsibility and the pro-active management of the GlaxoSmithKline manufacturing and supply base, 35 of the key contract manufacturers and suppliers were also assessed. This process evaluated the management of human rights and EHS risks and impacts based on the Group’s requirements for contract manufacturers.
Recommendations were made for improvements where needed.
EHS improvement
Objectives for 2004 focused on the emerging issues of pharmaceuticals in the environment, chemicals policy and climate change, with a theme of responding to external EHS challenges.
Numerical targets for EHS performance improvements set in 2001 are to be accomplished over five years. Progress toward meeting these targets is tracked every year and will be published on the website www.gsk.com. To date significant progress has been made towards achieving the EHS targets.
GlaxoSmithKline selects its measures of performance improvement based on the potential for adverse impact on people or the environment, business continuity or business reputation. Most of the measures selected are similar to those reported by other companies and are recommended by the Global Reporting Initiative, a long-term, multi-stakeholder, international undertaking to develop and disseminate globally applicable sustainability reporting guidelines.
Sustainability
In the work towards eventual sustainability GlaxoSmithKline is addressing economic, environmental and social issues in research, manufacturing, sales and distribution of our medicines. Sustainability starts with healthcare solutions found by research and development and continues with sustainable solutions in manufacturing and sales. The Group is currently looking into improving operational efficiency and in the future will investigate the use of renewable resources and the overall balance of its impact on society and the environment. The Group seeks dialogue with external stakeholders and considers their views when developing our approaches to sustainable development. More information on EHS programmes and performance may be found on the website.
| Business review | ||
| Financialreview2007 | ||
| continued | ||
business performance EPS grew 10% to 99.1p. The dividend was raised 10% to 53p. Share repurchases were £3.8 billion in 2007, with | |
The Board
Sir Christopher Gent (Aged 56)Appointed on 1st June 2004Chairman. Sir Christopher was the Chief Executive Officer of Vodafone plc, until his retirement in July 2003. He is a Non-Executive Director of Lehman Brothers Holdings Inc, a Director of the International Advisory Board of Hakluyt & Co, and is a Senior Adviser at Bain & Co.
Dr Jean-Pierre Garnier (Aged 57)Appointed on 23rd May 2000Chief Executive Officer. Dr Garnier was appointed an Executive Director of SmithKline Beecham plc in 1992, and became Chief Executive Officer in April 2000. He is a Non-Executive Director of United Technologies Corporation and a member of the Board of Trustees of the Eisenhower Exchange Fellowships. He holds a PhD in pharmacology from the University of Louis Pasteur in France and an MBA from Stanford University in the USA.
John Coombe (Aged 59)Appointed on 23rd May 2000. Retiring on 31st March 2005. Chief Financial Officer. Mr Coombe was formerly an Executive Director of Glaxo Wellcome plc where he was responsible for Finance and Investor Relations. He is a member of the Supervisory Board of Siemens AG and the Code Committee of the UK Takeover Panel and was appointed a Non-Executive Director of HSBC Holdings plc on 1st March 2005.
Lawrence Culp (Aged 41)Appointed on 1st July 2003Non-Executive Director. Mr Culp is President and Chief Executive Officer of Danaher Corporation. Prior to joining Danaher, he held positions in Accenture, previously Andersen Consulting.
Sir Crispin Davis (Aged 55)Appointed on 1st July 2003Non-Executive Director. Sir Crispin is Chief Executive of Reed Elsevier PLC. Prior to that, he was Chief Executive of Aegis Group plc, which he joined from Guinness plc, where he was a member of the main board and Group Managing Director of United Distillers. He spent his early career with Procter & Gamble.
Sir Deryck Maughan (Aged 57)Appointed on 1st June 2004Non-Executive Director. Sir Deryck was formerly Chairman and CEO of Citigroup International and of Salomon Brothers Inc. He serves on the Boards of Directors of Carnegie Hall, Lincoln Center and NYU Medical Center. He is also an International Advisory Board member of British American Business Inc. and a Board member of the American Academy in Berlin and the Trilateral Commission. He served as Vice Chairman of the New York Stock Exchange from 1996 to 2000.
Sir Ian Prosser (Aged 61)Appointed on 23rd May 2000Senior Independent Director. Sir Ian was formerly a Non-Executive Director of SmithKline Beecham plc. He was Chairman and Chief Executive of Bass PLC (latterly Intercontinental Hotels PLC) and Chairman of the World Travel & Tourism Council. He is Non-Executive Deputy Chairman of BP plc and a Non-Executive Director of Sara Lee Corporation. He is also a member of the CBI President’s Committee.
Dr Ronaldo Schmitz (Aged 66)Appointed on 23rd May 2000Non-Executive Director. Dr Schmitz was formerly a Non-Executive Director of Glaxo Wellcome plc. He is a Non-Executive Director of Legal & General Group plc and a member of the Board of Directors of Rohm and Haas Company and Cabot Corporation.
Dr Lucy Shapiro (Aged 64)Appointed on 23rd May 2000Non-Executive Director. Dr Shapiro was formerly a Non-Executive Director of SmithKline Beecham plc. She is Ludwig Professor of Cancer Research in the Department of Developmental Biology and Director of the Beckman Center for Molecular and Genetic Medicine at the Stanford University School of Medicine and a Non-Executive Director of Anacor Pharmaceuticals, Inc. She holds a PhD in molecular biology from Albert Einstein College of Medicine.
Sir Robert Wilson (Aged 61)Appointed on 1st November 2003Non-Executive Director. Sir Robert is Non-Executive Chairman of BG Group plc and the Economist Group and was previously Executive Chairman of Rio Tinto plc.
Dr Tachi Yamada (Aged 59)Appointed on 1st January 2004Chairman, Research & Development. Dr Yamada was a Non-Executive Director, and subsequently an Executive Director, of SmithKline Beecham plc. Prior to joining SmithKline Beecham, he was Chairman of the Department of Internal Medicine at the University of Michigan Medical School and Physician-in-Chief of the University of Michigan Medical Center. He was a member of the Board of Directors of diaDexus, Inc. until December 2004 and is a Trustee of the Rockefeller Brothers Fund.
Chief Financial Officer DesignateJulian Heslop (Aged 51)Mr Heslop will succeed Mr Coombe as Chief Financial Officer with effect from 1st April 2005 when he will also join the Board. Mr Heslop joined Glaxo Wellcome as Financial Controller in April 1998. In January 2001, following the merger, he was appointed Senior Vice President, Operations Controller. Prior to joining Glaxo Wellcome, he held senior finance roles at Grand Metropolitan PLC.
Other DirectorsDr Michèle Barzach, Mr Donald McHenry and Mr John McArthur, all Non-Executive Directors, retired from the Board following the conclusion of the AGM on 17th May 2004 and Sir Christopher Hogg (the former Chairman) and Sir Peter Job, both Non-Executive Directors, retired from the Board on 31st December 2004.
Details of membership of the Board Committees may be found on page 37.
Corporate Executive Team (CET)
JP GarnierChief Executive OfficerAs Chief Executive Officer, Dr Garnier is responsible for the management of the Group. He oversees all operational aspects of the Group, including establishing policies, objectives and initiatives, and he directs long-term strategy. He was formerly Chief Executive Officer of SmithKline Beecham, having joined the Group in 1990.
Rupert BondySenior Vice President and General CounselMr Bondy is responsible for legal matters across the Group, together with environmental, health and safety issues, insurance and security. He was a lawyer in private practice before joining SmithKline Beecham in 1995.
Ford CalhounChief Information OfficerDr Calhoun is responsible for information technology, a global function that enables key business processes across all parts of the Group. With doctoral and post-doctoral training in microbiology, genetics, biomathematics and computer science, he joined Smith Kline & French in 1984.
John CoombeChief Financial Officer retiring on 31st March 2005As head of the finance function, Mr Coombe is responsible for activities such as financial reporting and control, tax and treasury, investor relations, finance systems, internal audit and real estate. He joined Glaxo in 1986 as Group Financial Controller and was appointed Group Finance Director in 1992.
Marc DunoyerPresident, Pharmaceuticals JapanMr Dunoyer was appointed President, Pharmaceuticals Japan in March 2003. He joined the Group in 1999 and was Senior Vice President and Regional Director, Japan until his current appointment.
Russell GreigPresident, Pharmaceuticals InternationalDr Greig leads the pharmaceutical operations outside the USA and most of Europe, covering more than 100 countries. He joined the Group in 1980 and was Senior Vice President, Worldwide Business Development for R&D prior to his current appointment in March 2003.
Dan PhelanSenior Vice President, Human ResourcesMr Phelan is responsible for benefits, compensation, recruitment, organisation development, leadership development and succession planning, human resource information systems and employee health management. He was a lawyer in private practice before joining Smith Kline & French in 1981 and in 1994 was appointed Senior Vice President and Director, Human Resources, SmithKline Beecham.
David PulmanPresident, Global Manufacturing & SupplyDr Pulman is responsible for the Global Manufacturing and Supply Organisation and Global Procurement. He joined Glaxo in 1978 and was responsible for the North American supply network, manufacturing strategy and logistics until his current appointment in 2002.
David StoutPresident, Pharmaceutical OperationsMr Stout is responsible for the global pharmaceuticals and vaccines businesses. He joined SmithKline Beecham in 1996 as head of its US Sales and Marketing and was President, US Pharmaceuticals, until his current appointment in January 2003.
Chris ViehbacherPresident, US PharmaceuticalsMr Viehbacher has been responsible for US Pharmaceuticals since January 2003. He joined Wellcome in 1988 and became Director, Continental Europe at Glaxo Wellcome in 1999. He was responsible for GlaxoSmithKline’s European Pharmaceuticals business before his current appointment.
Andrew WittyPresident, Pharmaceuticals EuropeMr Witty has been responsible for the Group’s pharmaceuticals operations in Europe since January 2003. He joined Glaxo in 1985 and at GlaxoSmithKline was Senior Vice President, Asia Pacific until his current appointment.
Tachi YamadaChairman, Research & DevelopmentDr Yamada leads the Group’s complex business of drug discovery and development, creating new medicines through research. He joined SmithKline Beecham in 1994 as a Non-Executive member of the Board and became Chairman, R&D Pharmaceuticals in 1999. He was appointed to the Board of Directors on 1st January 2004.
Jennie YoungerSenior Vice President, Corporate Communications & Community PartnershipsMrs Younger is responsible for the Group’s internal and external communications, its image and partnerships with global communities. She joined Glaxo Wellcome in 1996 as Director of Investor Relations and was appointed to her current position in 2001. In 2004 she won the European Women of Achievement Award for Business.
Jack ZieglerPresident, Consumer HealthcareMr Ziegler is head of the global Consumer Healthcare business, which produces oral healthcare, over-the-counter medicines and nutritional healthcare products. He joined SmithKline Beecham in 1991 and in 1998 was appointed President of the Consumer Healthcare business.
Julian HeslopChief Financial Officer DesignateMr Heslop will succeed Mr Coombe as Chief Financial Officer with effect from 1st April 2005, when he will also join the CET.
Mr Heslop joined Glaxo Wellcome as Financial Controller in April 1998. Following completion of the merger he was appointed Senior Vice President, Operations Controller.
Other membersMr Ingram continues to work part-time as Vice Chairman of Pharmaceuticals, acting as a special advisor to the Group and attending CET meetings in that capacity.
Governance and policy
The Board and Corporate Executive TeamThe Directors are listed under ‘The Board’ (page 34).
The Board is responsible for the Group’s system of corporate governance and is ultimately accountable for the Group’s activities, strategy and financial performance.
The Chief Executive Officer (CEO) is responsible for executive management of the Group and is assisted in this by the CET. The CET meets 11 times per year and otherwise as necessary. The members and their responsibilities are listed under “Corporate Executive Team” (page 35).
The Board comprises three Executive and eight Non-Executive Directors. Whilst the Board considers all its Non-Executive Directors to be independent in character and judgement, it has determined that one Non-Executive Director, Dr Shapiro, should not be considered as ’independent’ under the Combined Code. Dr Shapiro is not considered to be independent due to the remuneration that she receives from the Group as a member of the GlaxoSmithKline Scientific Advisory Board. When Sir Christopher Gent was appointed to the Board as Deputy Chairman, he was determined by the Board to be independent. Upon taking up the chairmanship of the Board on 1st January 2005, in accordance with the Combined Code, he was excluded from the determination of whether at least half the Board are independent Non-Executive Directors. Neither Dr Shapiro nor Sir Christopher Gent hold positions on a Board Committee where independence is required under the Combined Code.
The Board considers that Mr Culp, Sir Crispin Davis, Sir Deryck Maughan, Sir Ian Prosser, Dr Schmitz and Sir Robert Wilson are independent in accordance with the recommendations of the Combined Code.
The following directors who retired during the year were not considered by the Board to be independent in accordance with the Combined Code: Dr Barzach, because she received remuneration from a Group subsidiary, as a healthcare consultant and Mr McHenry and Sir Christopher Hogg, due to their length of service. Mr McArthur and Sir Peter Job, who also retired during the year, were both considered to be independent.
At the date of publication and throughout 2004, a majority of the Board members, excluding the Chairman, were independent Non-Executive Directors.
Sir Christopher Hogg was Chairman throughout 2004 and retired from the Board on 31st December 2004. In May 2004, Sir Christopher Gent was appointed Deputy Chairman with effect from 1st June 2004. The Board agreed that Sir Christopher Gent would succeed Sir Christopher Hogg as Chairman with effect from 1st January 2005. Dr Garnier is CEO.
The Chairman leads the Board, and represents the Board to the CEO and other CET members as necessary between Board meetings. The CEO manages the Group and implements the strategy and policies adopted by the Board. The Chairman and the chairmen of Board Committees communicate regularly with the CEO and other CET members. The division of responsibilities between the role of Chairman and the CEO has been set out in writing, agreed by the Board and appears in full on the website.
Sir Ian Prosser was Senior Independent Director (SID) throughout 2004.
Board processThe Board has the authority, and is accountable to shareholders, for ensuring that the company is appropriately managed and achieves the strategic objectives it sets. The Board discharges those responsibilities through an annual programme of meetings which includes the approval of overall budgetary planning and business strategy.
The Board reviews the company’s internal controls and risk management policies and approves its governance structure and code of ethics. The Board appraises and approves major financing, investment and contractual decisions in excess of defined thresholds. In addition to these matters, the Board evaluates and monitors the performance of the Group as a whole. This includes:
The Board has overall responsibility for succession planning for the CEO and the other Executive Directors. The Board has given the CEO broad authority to operate the business of the Group and the CEO is accountable for, and reports to the Board on, business performance.
CET members make regular presentations to the Board on their areas of responsibility and the Board meets with all the CET members on an annual basis to discuss collectively the Group’s strategy. A primary element of the induction process for new Non-Executive Directors is undertaken by members of the CET, and all Non-Executive Directors are encouraged to have separate informal discussions at their discretion with any CET members.
The Board met six times in 2004 with each member attending as follows:
| Name | Number of meetings held whilst a Board member | Number of meetings attended | ||
| Sir Christopher Gent | 3 | 3 | ||
| Dr JP Garnier | 6 | 6 | ||
| Mr J Coombe | 6 | 6 | ||
| Dr T Yamada | 6 | 6 | ||
| Mr L Culp | 6 | 6 | ||
| Sir Crispin Davis | 6 | 5 | ||
| Sir Deryck Maughan | 3 | 2 | ||
| Sir Ian Prosser | 6 | 6 | ||
| Dr R Schmitz | 6 | 5 | ||
| Dr L Shapiro | 6 | 6 | ||
| Sir Robert Wilson | 6 | 6 | ||
| Sir Christopher Hogg | 6 | 6 | ||
| Dr M Barzach | 3 | 3 | ||
| Sir Peter Job | 6 | 4 | ||
| Mr J McArthur | 3 | 2 | ||
| Mr D McHenry | 3 | 3 | ||
In addition to the six scheduled meetings referred to above, the Board also met on a quorate basis on one occasion.
Independent AdviceThe Board recognises that there may be occasions when one or more of the Directors feel it is necessary to take independent legal and/or financial advice at the company’s expense. There is an agreed procedure to enable them to do so. The procedure to be followed is explained in the Corporate Governance section of the company’s website.
Company SecretaryThe Company Secretary is responsible to the Board and is available to individual Directors in respect of Board procedures. The Company Secretary is Simon Bicknell, who was appointed in May 2000. He is a barrister and joined the Group in 1984. He is secretary to all the Board Committees.
Board CommitteesThe Board has established a number of Committees and provides sufficient resources to enable them to undertake their duties. Current membership of these Committees is given in the table below.
| Corporate | ||||||||
| Audit | Remuneration | Nominations | Responsibility | |||||
| Sir Christopher Gent | – | – | C | C | ||||
| Dr JP Garnier | – | – | – | – | ||||
| Mr J Coombe | – | – | – | – | ||||
| Dr T Yamada | – | – | – | – | ||||
| Mr L Culp | – | M | – | – | ||||
| Sir Crispin Davis | – | M | – | – | ||||
| Sir Deryck Maughan | M | – | – | – | ||||
| Sir Ian Prosser | M | – | M | M | ||||
| Dr R Schmitz | C | – | M | – | ||||
| Dr L Shapiro | – | – | – | M | ||||
| Sir Robert Wilson | M | C | – | – | ||||
| Key: C = Chairman. M = Member. In addition, each Director is a member of the Corporate Administration & Transactions and Financial Results Committees. | ||||||||
The following is a summary of the role and terms of reference of each Committee. The current full terms of reference of each Committee can be obtained from the Company Secretary or the Corporate Governance section of the company’s website.
Audit CommitteeThe Audit Committee reviews the financial and internal reporting process, the system of internal controls, the management of risks and the external and internal audit process. The Committee also proposes to shareholders the appointment of the external auditors and is directly responsible for their remuneration and oversight of their work. The Committee consists entirely of independent Non-Executive Directors. It meets at least four times a year and otherwise as necessary. The Audit Committee Report is given on page 40 to 41.
Remuneration CommitteeThe Remuneration Committee determines the terms of service and remuneration of the Executive Directors and members of the CET and, with the assistance of external independent advisors, it evaluates and makes recommendations to the Board on overall executive remuneration policy. The Committee consists entirely of independent Non-Executive Directors. It meets at least four times a year and otherwise as necessary. Information on the remuneration of Directors is given in the Remuneration Report on pages 43 to 58.
The Chairman of the company and the CEO are responsible for evaluating and making recommendations to the Board on the remuneration of the Non-Executive Directors.
Nominations CommitteeThe Nominations Committee reviews the structure, size and composition of the Board and the appointment of members of the Board and the CET, and makes recommendations to the Board as appropriate. The Committee also monitors the planning of succession to the Board and Senior Management. The Committee consists entirely of Non-Executive Directors, of whom a majority are independent, and meets at least once a year to consider succession planning and otherwise as necessary. The Nominations Committee Report is given on page 41.
Corporate Responsibility CommitteeThe Corporate Responsibility Committee consists entirely of Non-Executive Directors and provides a Board-level forum for the regular review of external issues that have the potential for serious impact upon the Group’s business and the oversight of reputation management. The Committee is also responsible for governance oversight of the Group’s worldwide donations and community support. The Committee meets formally three times a year and has further meetings and consultations as necessary.
Financial Results CommitteeThe Financial Results Committee reviews and approves, on behalf of the Board, the Annual Report and Form 20-F, the Annual Review and the convening of the Annual General Meeting, together with the preliminary and quarterly statements of trading results. Each Director is a member of the Committee and the quorum for a meeting is any three members. To be quorate, each meeting must include the Chairman or the Chairman of the Audit Committee and the CEO or the CFO. The Committee meets as necessary.
Corporate Administration & Transactions CommitteeThe Corporate Administration & Transactions Committee reviews and approves matters in connection with the administration of the Group’s business, and certain corporate transactions. The Committee consists of the Directors, CET members and the Company Secretary. The Committee meets as necessary.
Evaluation of the Board, Board Committees and DirectorsThe performance evaluation of the Board, its Committees and Directors is normally undertaken by the Chairman and implemented in collaboration with the Committee Chairmen and with the support of the Company Secretary. Following the appointment of Sir Christopher Gent in June 2004 as Deputy Chairman, it was decided that the Deputy Chairman would undertake the 2004 performance evaluation of the Board, its Committees and Directors in collaboration with the Committee Chairmen and the Company Secretary.
The 2004 Board evaluation was conducted by way of a questionnaire followed by a private discussion between the Deputy Chairman and each of the Directors, including the Chairman. An external consultant was appointed to assist in the evaluation of the Audit Committee.
Dialogue with shareholders
Financial results are announced quarterly.
The company reports formally to shareholders twice a year, when its half-year and full-year results are announced. The full-year results are included in the company’s Annual Report and Annual Review, which are issued to shareholders. The company’s half-year results are published in a national newspaper shortly after they are released. The CEO and CFO give presentations on the full-year results to institutional investors, analysts and the media in London and in New York. In addition, there are teleconferences after the release of the first, second and third quarter results for institutional investors, analysts and the media. The Annual Report, Annual Review and quarterly results may also be accessed on the company’s website.
The Annual General Meeting (AGM) takes place in London and formal notification is sent to shareholders at least one month in advance. At the Meeting, a business presentation is made to shareholders and all Directors able to attend are available, formally during the Meeting, and informally afterwards, for questions. Committee Chairmen ordinarily attend the AGM to respond to shareholders’ questions. Dr Schmitz, Chairman of the Audit Committee, was unable to attend the Company’s AGM in May 2004 because he was convalescing. Sir Crispin Davis and Mr McArthur were also unable to attend the meeting due to other commitments. All resolutions at the AGM are decided on a poll as required by the company’s Articles of Association. The results of the poll are announced to the London Stock Exchange and posted on the company’s website. Details of the 2005 AGM are set out in the section ‘Annual General Meeting’ (see this page).
To ensure that the Non-Executive Directors are aware of and understand the views of major shareholders about the company, the Board has in place a process focusing on sector-specific issues, as well as general shareholder preferences.
The CEO and CFO maintain a dialogue with institutional shareholders on performance, plans and objectives through a programme of regular meetings. They both speak regularly at external conferences and presentations.
The Group’s Investor Relations department, with offices in London and Philadelphia, acts as a focal point for contact with investors throughout the year.
The Chairman of the Remuneration Committee meets with major shareholders to discuss executive remuneration policy. All Non-Executive Directors, including new appointees, are available to meet with major shareholders if this is requested.
The company’s website gives access to current financial and business information about the Group.
Share buy-back programmeIn October 2002, following the completion of the £4 billion share buy-back programme announced in 2001, the company announced plans for a further £4 billion share buy-back programme. Of this programme, £219 million was accounted for in 2002, £980 million in 2003 and £1,000 million in 2004. The programme covers purchases by the company of shares for cancellation or to be held as Treasury Shares, in accordance with the authority given by shareholders at the company’s AGM in 2004.
In May 2004 the company was authorised to purchase a maximum of 594.6 million shares. During 2004 18.1 million shares were purchased for cancellation and 69.9 million were purchased and held as Treasury Shares (see Note 27 to the Financial statements, ‘Share capital and share premium account’). The exact amount and timing of future purchases, and the extent to which repurchased shares will be held as Treasury Shares rather than being cancelled, will be determined by the company and is dependent on market conditions and other factors.
Donations to Political Organisations and EU Political ExpenditureAt the AGM in May 2001, shareholders first authorised the company to make donations to EU Political Organisations and to incur EU Political Expenditure, under the provisions of the Political Parties, Elections and Referendums Act 2000, of up to £100,000 each year. This authority has since been renewed annually. Although the company does not make and does not intend to make such payments or donations to political parties, within the normal meaning of that expression, the definition in the legislation of ‘EU Political Organisation’ is wide. It can extend to bodies, which the company and its subsidiaries might wish to support including those concerned with policy review, law reform, the representation of the business community and special interest groups, such as those concerned with the environment. The Group made donations to non-EU Political Organisations totalling £291,000 during 2004 (£353,000 in 2003). No donations were made to EU Political Organisations.
Annual General Meeting
The AGM will be held at 2.30pm on Wednesday, 25th May 2005 at The Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE. The business to be transacted at the meeting will include:
Internal control framework
The Board recognises its responsibility to present a balanced and understandable assessment of the Group’s position and prospects. The structure of accountability and audit operated in GlaxoSmithKline is as follows.
The Board has accountability for reviewing and approving the adequacy and effectiveness of internal controls operated by the company, including financial, operational and compliance controls and risk management. The Board has delegated responsibility for such review to the Audit Committee, which receives reports from those individuals identified in the Committee’s Report on pages 40 to 41. It is the responsibility of management, through the CET, to implement Board policies on risk and control. The CET is responsible for identifying, approving, monitoring and enforcing key policies that go to the heart of how the Group conducts business. The internal control framework includes central direction, resource allocation and risk management of the key activities of research and development, manufacturing, marketing and sales, legal, human resources, information systems and financial practice. As part of this framework, there is a comprehensive planning system with an annual budget approved by the Board. The results of operating units are reported monthly and compared to the budget. Forecasts are prepared regularly during the year.
Extensive financial controls, procedures, self-assessment exercises and risk activities are reviewed by the Group’s internal auditors. Commercial and financial responsibility, however, is clearly delegated to local business units, supported by a regional management structure. These principles are designed to provide an environment of central leadership coupled with local operating autonomy as the framework for the exercise of accountability and control within the Group.
The Group also attaches importance to clear principles and procedures designed to achieve appropriate accountability and control. A Group policy, ‘Risk Management and Legal Compliance’, mandates that business units establish processes for managing and monitoring risks significant to their businesses and the Group.
The internal control framework also relies on the following for overseeing and reporting risk and compliance issues.
Risk Oversight and Compliance Council (ROCC)The ROCC is a council of senior executives authorised by the Board to assist the Audit Committee oversee the risk management and internal control activities of the Group. Membership comprises several CET members and some of the heads of departments with internal control, risk management, audit and compliance responsibilities. A direct reporting line to the Audit Committee provides a mechanism for bypassing the executive management should the need ever arise.
The ROCC meets on a regular basis to review and assess significant risks and their mitigation plans. The ROCC, responding to the Group policy referred to above, has provided the business units with a framework for risk management and upward reporting of significant risks. Mitigation planning and identification of a manager with overall responsibility for management of any given risk is a requirement.
Risk Management and Compliance Boards (RMCBs)Risk Management and Compliance Boards (RMCBs) have been established in each of the major business units. Membership often comprises members of the senior executive team of the respective business unit, augmented by specialists where appropriate. The RMCBs oversee management of all risks that are considered important for their respective business units, including those risks that are designated as significant to GlaxoSmithKline as a whole, thus increasing the number of risks that are actively managed across the Group.
Each RMCB regularly reports the status regarding its significant risks to the ROCC.
Compliance functionsIn a number of risk areas, specific standards that meet or exceed requirements of applicable law have been established. Specialist audit and compliance groups (for example Corporate Environment, Health & Safety, Global Quality Assurance and Worldwide Regulatory Compliance) assist in the dissemination, implementation and audit of these standards.
Corporate Ethics & Compliance (CEC)The ROCC is also supported by the Corporate Ethics & Compliance department which is responsible for supporting the development and implementation of practices that facilitate employees’ compliance with laws and Group policy.
The thrust of the Group’s compliance effort is due diligence in preventing and detecting misconduct and non-compliance with law or regulation by promoting ethical behaviour, compliance with all laws and regulations, corporate responsibility at all levels, and effective compliance systems.
The CEC is managed by the Corporate Compliance Officer, who reports directly to the CEO. The Corporate Compliance Officer chairs the ROCC and provides summary reports on the ROCC’s activities and the Group’s significant risks to the CET and the Audit Committee on a regular basis.
Areas of potentially significant riskFor details of risks affecting the Group, see Note 30 to the Financial statements, ‘Legal proceedings’ and ‘Risk factors’ on pages 76 to 78.
40GlaxoSmithKline Corporate governance
Effectiveness of controlsThe internal control framework has been in operation for the whole of the year under review and continues to operate up to the date of approval of this report. The system of internal controls is designed to manage rather than eliminate the risk of not achieving business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss.
The Audit Committee receives reports on areas of significant risk to the Group and on related internal controls. Following consideration of these reports, the Audit Committee reports annually to the Board on the effectiveness of controls. Such controls may mitigate but cannot eliminate risks. In addition, there are areas of the Group’s business where it is necessary to take risks to achieve a satisfactory return for shareholders, such as investment in R&D and in acquiring new products or businesses. In these cases it is the Group’s objective to apply its expertise in the prudent management rather than elimination of risk. The Directors’ review relates to the company and its subsidiaries and does not extend to material associated undertakings, joint ventures or other investments.
The Board, through the Audit Committee, has reviewed the assessment of risks and the internal control framework that operates in GlaxoSmithKline and has considered the effectiveness of the system of internal control in operation in the Group for the year covered by this report and up to the date of its approval by the Board. The process followed by the Board in reviewing the system of internal controls accords with the guidance on internal control issued by the Turnbull Committee in 1999.
Committee reports
Audit Committee ReportThe Audit Committee’s role flows directly from the Board’s oversight function and it is authorised by the Board to investigate any activity within its terms of reference. The Committee has written terms of reference which have been approved by the Board. The Committee reports regularly to the Board on the performance of the activities it has been assigned. The Committee’s main responsibilities include reviewing the corporate accounting and financial reporting process, monitoring the integrity of the company’s financial statements, evaluating the system of internal control and the management of risks, overseeing activities of each of the Group’s compliance audit functions and overseeing compliance with laws, regulations and ethical codes of practice. The Committee’s oversight role requires it to address regularly the relationships between management and the internal and external auditors, and understand and monitor the reporting relationships and tiers of accountability between these parties. The Committee receives regular reports from members of the CET and senior managers covering the key compliance activities of the Group, including those concerning R&D, manufacturing, sales and marketing and EHS.
The Committee is entirely composed of independent Non-Executive Directors. Committee members bring considerable financial and accounting experience to the Committee’s work. Members have past employment experience in either finance or accounting roles or comparable experience in corporate activities.
The Board has determined that the combined qualifications and experience of the Committee members, when taken together with its modus operandi, give the Committee collectively the financial expertise necessary to discharge its responsibilities.
Accordingly, the Board has chosen not to nominate any one committee member as having recent and relevant financial experience as defined by the Combined Code.
In arriving at its conclusion, the Board considered the following points. Dr Schmitz has been the Chairman of the Committee since April 2001. Prior to his appointment as a Non-Executive Director of the company, he was a Non-Executive Director of Glaxo Wellcome plc, where he served on the Audit Committee. Dr Schmitz has also been a member of the Executive Board of Directors of Deutsche Bank AG. He retired from that Board in 2000 having been in charge of investment banking. Dr Schmitz was formerly a member of the Executive Board of Directors of BASF from 1980 to 1990, including CFO from 1985 to 1990. He holds an MBA from Insead. Sir Ian Prosser was CFO and later CEO of Bass PLC and is a member of the Institute of Chartered Accountants in England and Wales. Sir Robert Wilson began his professional career as an economist. He is Chairman of BG Group plc. He held senior management positions at Rio Tinto plc culminating in his appointment as Executive Chairman, from which he retired in 2003. Sir Deryck Maughan was appointed a member of the Committee on 21st January 2005. He was Chairman and Chief Executive Officer of Citigroup International and Vice Chairman of Citigroup Inc. Prior to the creation of Citigroup, he was Chairman and Co-Chief Executive Officer of Salomon Smith Barney. He was also Chairman and Chief Executive Officer of Salomon Brothers. Sir Peter Job, who retired from the Board on 31st December 2004, was CEO of Reuters plc from 1991 to 2001 and brought considerable industrial experience to his role as a member of the Committee.
The Committee is supported by the Company Secretary, who attends the Committee’s meetings, and it has available to it financial resources to take independent professional advice when considered necessary. Meetings of the Committee are attended by the Chairman, CEO, CFO, General Counsel, Head of Global Internal Audit (GIA), Corporate Compliance Officer and the external auditors.
In 2004, the Committee worked to a structured programme of activities, with standing items that the Committee is required to consider at each meeting together with other matters focused to coincide with key events of the annual financial reporting cycle:
Corporate governance GlaxoSmithKline 41
The Audit Committee, management, internal auditors and the full Board work together to ensure the quality of the company’s corporate accounting and financial reporting. The Committee serves as the primary link between the Board and the external and internal auditors. This facilitates the necessary independence from management and encourages the external and internal auditors to communicate freely and regularly with the Committee. In 2004, the Committee met both collectively and separately with the external auditors and the Head of GIA, without members of management being present.
The Committee has primary responsibility for making a recommendation to shareholders on the appointment, reappointment and removal of the external auditors by annually assessing the qualifications, expertise, resources and independence of the external auditors and the effectiveness of the audit process.
In making its assessment, the Committee considers papers which detail the relevant regulatory requirements required of external auditors and evaluates reports from the external auditors on their compliance with the requirements. Where the external auditors provide non-audit services, the Committee ensures that auditor objectivity and independence are safeguarded by a policy requiring pre-approval by the Audit Committee for such services. Expenditure on audit and non-audit services is set out on page 104.
The guidelines set out in the company’s policy on engaging the external auditors to provide non-audit services include ascertaining that: the skills and experience of the external auditors make them a suitable supplier of the non-audit services; adequate safeguards are in place so that the objectivity and independence of the audit are not compromised; and the fee levels relative to the annual audit fee are within the limits set by the Committee.
The company also has well-established policies, including a Code of Ethics, which is available on its website, and a help-line facility for the reporting and investigation of unlawful conduct. No waivers to the code were made in 2004.
The Committee met in full session five times in 2004 and five times on a quorate basis. Each full session was attended by all members except Sir Peter Job, who was unable to attend two meetings.
Nominations Committee ReportThe Nominations Committee’s terms of reference include responsibility for proposing the appointment of Board and Committee members. During 2004, the Committee made recommendations to the Board on the appointment of Sir Christopher Gent, Sir Deryck Maughan and Mr Heslop.
In the case of the Chairman, the Committee focused on identifying an individual of the calibre and experience required to chair a complex global organisation.
When recruiting Non-Executive Directors, the Committee considers the particular skills, knowledge and experience that would benefit the Board most significantly for each appointment. Broad selection criteria are used which focus on achieving a balance between the representation of UK and US markets, and having individuals with CEO experience and skills developed in various sectors and specialities. Professional search agencies are engaged specialising in the recruitment of high calibre Non-Executive Directors. Dossiers of potential Non-Executive appointees are provided to the Committee and candidates are short-listed for interview after considering their relevant qualifications. New Non-Executive Directors offer themselves for election at the company’s next AGM. Their appointments are announced publicly.
A customised induction process was conducted for each of the new Non-Executive Directors focusing on their particular experience and taking account of their different backgrounds. This process included meeting key members of the CET and other senior executives and, in some cases, visiting particular operational facilities of the Group.
In the case of the appointment of the new CFO, the Committee considered the particular skills, knowledge and experience required to be the CFO of GlaxoSmithKline. The Committee considered a number of potential external and internal candidates before recommending to the Board to approve the appointment of Mr Heslop. The Board approved Mr Heslop’s appointment, which was publicly announced in October 2004. Mr Heslop will offer himself for election at the company’s AGM in May 2005.
The Committee met three times during 2004 in full session and twice on a quorate basis. All members were present at the full meetings.
Remuneration ReportThe Remuneration Report can be found on pages 43 to 58.
The Combined Code
Throughout 2004, the company complied with the Code provisions of the Combined Code, except as follows:
US law and regulation
A number of provisions of US law and regulation apply to GlaxoSmithKline because the company’s shares are quoted on the New York Stock Exchange (NYSE) in the form of ADSs.
42GlaxoSmithKline Corporate governance
NYSE rulesIn general, the NYSE rules permit the company to follow UK corporate governance practices instead of those that apply in the USA, provided that the company explains any significant variations. This explanation is provided on the company’s website.
Sarbanes-Oxley Act 2002Following a number of corporate and accounting scandals in the USA, Congress passed the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley). Sarbanes-Oxley established new standards for corporate accountability for companies listed in the USA. Although the company’s corporate governance structure was believed to be robust and in line with best practice, certain changes were necessary to ensure compliance with Sarbanes-Oxley.
As recommended by the Securities and Exchange Commission (SEC), GlaxoSmithKline established a Disclosure Committee. The Committee reports to the CEO, the CFO and to the Audit Committee. It is chaired by the Company Secretary and the members consist of senior managers from finance, legal, compliance, corporate communications and investor relations.
External legal counsel and the external auditors are invited to attend its meetings periodically. It has responsibility for considering the materiality of information and, on a timely basis, determining the disclosure and treatment of that information. It also has responsibility for the timely filing of reports with the SEC and the formal review of the Annual Report and Form 20-F. In 2004, the Committee met eight times.
Sarbanes-Oxley requires that the Annual Report contains a statement as to whether a member of the company’s Audit Committee is an audit committee financial expert.
The Board has reviewed the qualifications and backgrounds of the members of the Audit Committee and determined that, although no one member of the Company’s Audit Committee is an audit committee financial expert, the combined qualifications and experience of the Audit Committee members, when taken together with its modus operandi, give the Audit Committee collectively the financial expertise necessary to discharge its responsibilities. For an explanation of the basis for the Board’s judgement, refer to page 40.
For accounting periods ending on or after 15th July 2006, Sarbanes-Oxley requires that the company’s Form 20-F contain a report stating the responsibility of management for establishing and maintaining adequate internal control over financial reporting and assessing the effectiveness of the company’s internal control over financial reporting. Although the company is not required to report compliance in its 2004 Form 20-F, management has undertaken a process to ensure that it will be in a position to report compliance by the due date.
Sarbanes-Oxley also introduced a requirement for the CEO and the CFO to complete formal certifications, confirming that:
The CEO and CFO have completed these certifications, which will be filed with the SEC as part of the Group’s Form 20-F.
Controls and proceduresThe Group carried out an evaluation under the supervision and with the participation, of the Group’s management, including the CEO and CFO, of the effectiveness of the design and operation of the Group’s disclosure controls and procedures as at 31st December 2004. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures.
Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon the Group’s evaluation, the CEO and CFO have concluded that, as at 31st December 2004, the disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports the Group files and submits under the US Securities Exchange Act of 1934, as amended, is recorded, processed, summarised and reported as and when required.
There have been no changes in the Group’s internal control over financial reporting during 2004 that have materially affected, or are reasonably likely to affect materially, the Group’s internal control over financial reporting.
Remuneration Report
Introduction
The Remuneration Committee (or ‘Committee’) is responsible for making recommendations to the Board on the company’s remuneration policy and, within the terms of the agreed policy, determining the total individual remuneration packages of the Executives.
The remuneration policy set out in this report was finalised after undertaking an extensive consultation process with shareholders and institutional bodies during the course of 2003 and 2004.
GlaxoSmithKline’s remuneration policy is designed to establish a framework for remuneration that is consistent with the company’s scale and scope of operations and meets the recruitment needs of the business and is closely aligned with UK shareholder guidelines. As at 31st December 2004, the company was the second largest pharmaceutical company in the world by revenue, with operations in five continents with products sold in over 125 countries and with around 50 per cent of sales being generated in the USA.
Remuneration CommitteeThe composition of the Committee changed during the year. Mr McArthur retired from the Board in May 2004 and Sir Robert Wilson was appointed Chairman of the Committee. The other members of the Committee were Sir Crispin Davis, Sir Peter Job and Mr Culp. The Board deemed all of the members of the Committee to be independent Non-Executive Directors in accordance with the Combined Code.
The Committee met seven times during 2004 with each member attending as follows:
| Name | Number of meetings held whilst a Committee member | Number of meetings attended by Committee member | ||
| Sir Robert Wilson | 7 | 7 | ||
| (Chairman from 17th May 2004) | ||||
| Mr L Culp | 7 | 6 | ||
| Sir Crispin Davis | 7 | 7 | ||
| Mr J McArthur | 2 | 2 | ||
| (Chairman until 17th May 2004) | ||||
| Sir Peter Job (retired 31st Dec 2004) | 7 | 5 | ||
One quorate meeting was held to approve the formal grant of share options and performance share awards to give effect to the Committee’s decisions.
With the exception of the Company Secretary, no employees of the company were involved in the conduct of Committee meetings. Dr Garnier (CEO) and the Senior Vice President, Human Resources, were invited to attend part of some meetings of the Committee as required.
Deloitte & Touche LLP (Deloitte) have been appointed by the Committee to provide it with independent advice on executive remuneration.
Deloitte provided other consulting services to GlaxoSmithKline during the year, but did not provide advice on Executive remuneration matters other than to the Committee.
Towers Perrin provides market data and data analysis to the Committee.
Remuneration policy
PrinciplesThe four core principles which underpin the remuneration policy for GlaxoSmithKline are:
In formulating the policy, the Committee also decided that:
Overall, the policy is intended to provide median total remuneration for median performance. Poor performance will result in total remuneration significantly below the pay comparator group median, with the opportunity to earn upper quartile total remuneration for exceptional performance.
This strong alignment with performance is demonstrably in the interests of shareholders and provides the Executives with unambiguous signals about the importance of delivering success to the company’s shareholders.
CommitmentThe Committee will apply this policy on a consistent and transparent basis. Any significant changes in the measures used to assess performance will be discussed with shareholders. In the use of comparators for pay benchmarking, the Committee will use its discretion to ensure that remuneration levels are reasonable, and if it believes that changes may cause concern amongst shareholders, the position will be discussed with shareholders prior to implementation.
Pay and performance comparatorsThe following table sets out the companies used for pay and performance comparison:
The merger of Aventis and Sanofi-Synthelabo during 2004 reduced the size of the comparator group to 13 companies and GlaxoSmithKline. The Committee subsequently determined that for a number of reasons, including focus of operation and market capitalisation, there was no other suitable company to add to the group.
BenchmarkingFor benchmarking purposes, total remuneration incorporates base salary, annual bonus and long-term incentives. When setting pay the Committee has due regard to the Executives’ pension arrangements.
The global pharmaceutical industry is used as the primary pay comparator for the Executives as it is the appropriate marketplace for the company’s most senior executive talent. In the first instance, pay is benchmarked to publicly available remuneration data for these companies.
To provide context to the above information, reference is made to the Towers Perrin annual global pharmaceutical pay survey for the Pharmaceutical Human Resources Association (PHRA). To ensure that the global pharmaceutical industry benchmark is subject to scrutiny and review, the Committee also considers pay data from other global businesses primarily in the consumer and the manufacturing sectors.
Prior to determining the annual long-term incentive opportunity, the Committee considers a range of vesting levels that may be achieved based on different assumptions such as share price growth, performance levels etc. For performance in line with expectations, total remuneration is targeted at the median of the comparator group and the long-term incentive opportunity is set in a way which provides for positioning of total remuneration at the median.
To ensure that a stable benchmark is developed and to reduce the impact of short-term fluctuations, incentive policies for other global pharmaceutical companies are assessed over a number of years.
Valuation methodThe projected value method is used to benchmark total remuneration. This method projects the future value of the remuneration package under different performance scenarios whilst moderating the impact of market fluctuations in the short term and strengthening the focus on performance.
Individual elements of remunerationThe balance between the fixed (base salary) and variable (annual bonus and long-term incentive) elements of remuneration changes with performance. The chart below shows the anticipated normal range of the mix between fixed and variable pay at different levels of performance for the CEO and the typical case for the other Executive Directors (“ED”). In some years, the ranges may be higher or lower depending on the performance of the company and the individual. The number of shares subject to the long-term incentive awards for the Executive Directors was unchanged from 2003.
Base salaryBase salaries are set by reference to the median for the relevant market. For Executives this is the pharmaceutical pay comparator group. Actual salary levels are reviewed annually and may vary depending on an Executive’s experience, responsibility and market value. Any changes usually take effect from 1st April. Base salaries for Dr Garnier and Dr Yamada were not changed during 2004. Mr Coombe’s base salary was increased by three per cent during 2004. Dr Garnier received $1,522,500, Mr Coombe £509,850 and Dr Yamada $725,000.
Annual bonusAll bonuses are determined on the basis of a formal review of annual performance against stretching financial targets based on profit before interest and tax and are subject to detailed assessment of individual, business unit and group achievements against objectives. No bonus is payable if financial performance is less than 96 per cent of the target performance. The individual performance against objectives can increase or decrease the bonus level by a factor which can range from zero to 1.5. Bonuses are subject to upper limits, which for the Executives other than the CEO, range between 100 per cent and 200 per cent of base salary. The CEO’s limit is 200 per cent.
An annual bonus paid on the basis of on-target business performance together with base salary provides annual cash in line with the median of the pay comparator group.
In the case of the CEO the bonus targets are set by the Board. Following the end of the financial year, the Committee reviews the CEO’s performance and determines the bonus payable, which is then recommended to the Board for approval. The CEO makes recommendations to the Committee regarding the performance level achieved against objectives for the other Executives. These recommendations are then considered by the Committee to determine the resultant bonus.
Executives can also choose to invest their bonus in GlaxoSmithKline shares for a minimum of three years under the Annual Investment Plan or the equivalent US plan. At the end of the three-year holding period, Executives are entitled to a matching award of 10 per cent of their deferred shareholding. The match is not subject to further performance conditions. This plan is open to approximately 700 senior executives on the same terms. The Committee believes that these arrangements encourage shareholding amongst senior executives and considers it appropriate for the Executives to participate on the same terms.
In setting bonus awards for 2004, the Committee took into account the achievement of management in maintaining growth on a CER basis, whilst absorbing £1.5 billion of lost sales to generics.
Long-term incentivesExecutives are eligible for performance share awards and share options. The remuneration policy provides that annual long–term incentive awards will normally be made up of a performance share award and a share option award.
The Committee considers that performance shares provide a stronger alignment to shareholder value, and therefore the remuneration policy places greater emphasis on the use of performance shares. Long-term incentive awards are determined such that for on-target performance more than half of the long-term incentive reward is derived from performance shares.
The grant of annual awards using more than one plan is consistent with the practice of the pay comparator group and other leading UK companies. Long-term incentives for the CET are provided on the same basis as the Executive Directors.
Performance share awards and share options are delivered to US resident executives in the form of ADSs. Awards are delivered in the form of Ordinary Shares to executives resident in the UK and other countries. All awards are made under plans which incorporate dilution limits consistent with the guidelines provided by the Association of British Insurers, the National Association of Pension Funds and other shareholder representative bodies. Current estimated dilution from existing awards under all GlaxoSmithKline employee share schemes made since the merger is approximately five per cent of the company’s share capital at 31st December 2004.
a) Performance sharesFor the Executives, the level of performance shares vesting is based on the company’s Total Shareholder Return (TSR) relative to the performance comparator group (see page 45) over a three-year measurement period. TSR was chosen as the most appropriate comparative measure since it focuses on the return to shareholders, is a well-understood and tested mechanism to measure performance, and allows comparison between companies operating in different countries.
TSR is measured in sterling over the performance period and represents the change in the value of a share together with the value of reinvested dividends paid. In order to remove the impact of the varying tax treatments of dividends in different jurisdictions, all dividends are reinvested gross.
In respect of the performance share awards granted in December 2004, with the performance period 1st January 2005 to 31st December 2007, if GlaxoSmithKline is ranked at position seven (the mid–point) of the performance comparator group, 35 per cent of the shares will vest. Any ranking below this point will result in no shares vesting. Only if GlaxoSmithKline is one of the top two companies will all of the shares vest. When determining vesting levels, the Committee has regard for the company’s underlying financial performance.
| TSR rank with 13 companies & | Percentage of | |
| GlaxoSmithKline | award vesting* | |
| 1 | 100 | % |
| 2 | 100 | % |
| 3 | 87 | % |
| 4 | 74 | % |
| 5 | 61 | % |
| 6 | 48 | % |
| 7 | 35 | % |
| Below 7 | 0 | % |
To provide a closer link between shareholder returns and payments to the Executives, notional dividends are reinvested and paid out in proportion to the vesting of the award. The receipt of dividends has been incorporated into the benchmarking of award levels. In addition, performance shares earned by the Executives cannot be sold, except to meet related tax liabilities, for a further two years following the end of the vesting period. The Committee believes that this further aligns the interests of the Executives with the long–term interests of shareholders.
The vesting table for the performance share awards granted in December 2003, with the performance period 1st January 2004 to 31st December 2006, is given on page 56.
b) Share optionsShare options allow a holder to buy shares at a future date at the share price prevailing at the time of grant. Share options are granted to more than 12,000 managers at GlaxoSmithKline, including the Executives. The share options granted in 2004 to the Executives were linked to the achievement of compound annual EPS growth over the performance period.
The Committee considered that EPS was the key measure of the performance of the business and was also fully reflected through the business measures extended throughout the Group, ensuring organisational alignment.
When setting EPS targets, the Committee considers the company’s internal projections and analysts’ forecasts for GlaxoSmithKline’s EPS performance, as well as analysts’ forecasts for the pharmaceutical industry.
The following key principles govern the use of EPS as a performance measure:
The Committee will set out the basis of its decision if it considers it appropriate to make any adjustment.
For the 2004 grant, vesting increases on a straight-line basis for EPS performance between the hurdles set out in the table on the following page.
 | |||
This performance condition is substantially consistent with UK shareholder guidelines and expectations and is demanding when compared with those operated by other global pharmaceutical companies. This is consistent with the policy of providing pay for performance and only for performance.
Performance is measured over the three financial years following the grant of an option. The Committee has decided for the 2004 grant that there will be no performance retesting, so if the performance condition is not met after the three-year period, the option will lapse.
PensionsThe Executives participate in GlaxoSmithKline senior executive pension plans. The pension arrangements are structured in accordance with the plans operated for Executives in the country in which the Executives are likely to retire. Benefits are normally payable at age 60. Details of individual arrangements for the Executive Directors are set out on page 57. In response to the future pensions regime in the UK, the Committee will carefully consider the impact of the change in legislation and will decide how best to move forward when regulation is clearer and a market consensus emerges with a view to implementation in April 2006.
Share ownership requirementsTo align the interests of executives with those of shareholders, executives are required to maintain significant holdings of shares in GlaxoSmithKline. These requirements are an important part of aligning the interests of executives with shareholders. The CEO is required to hold shares to the value of four times base salary. Other Executive Directors are required to build a shareholding to the value of three times base salary. Members of the CET are required to build a shareholding to a value of two times base salary. The other top 700 executives in the Group are required to build a shareholding to a value of one times base salary. Executives are required to continue to satisfy these shareholding requirements for a minimum of twelve months following retirement from the company.
In order for shares to qualify for these share ownership requirements they must be held personally by the Executive or their spouse or minor children or have been earned but deferred under one of the share programmes operated by the company. Unexercised share options are not included in this calculation. As at 31st December 2004, Dr Garnier’s shareholding was 403,083 ADSs, Mr Coombe’s was 186,652 ordinary shares and Dr Yamada’s was 60,923 ADSs. These holdings were in excess of the share ownership requirements.
Other remuneration elementsThe Executives participate in various legacy Glaxo Wellcome and SmithKline Beecham all-employee share plans in either the UK or the USA and in the GlaxoSmithKline plans that replaced them.
The Sharesave plan and the ShareReward plan are Inland Revenue-approved plans open to all UK employees on the same terms. Mr Coombe is a member of the Sharesave plan, into which he contributes £250 a month. This provides him with the option to buy shares at the end of the three-year savings period in line with the opportunity available to all UK employees.
Mr Coombe also contributes £125 per month to buy shares under the ShareReward plan. The company matches the number of shares bought each month.
The Executives also receive other benefits including healthcare (medical and dental), personal financial advice and life assurance. The cash value of the benefits received by the Executive Directors in 2004 is shown on page 50.
Executive Director terms, conditions and remuneration
Executive Director contractsThe policy regarding the Executive Directors’ contracts was the subject of extensive review and change during 2003. The policy provides the framework for contracts for Executive Directors appointed in the future.
The key aspects of GlaxoSmithKline’s contractual framework are:
Dr Garnier, Mr Coombe and Dr Yamada agreed to changes in their previous contractual terms without compensation to come broadly in line with the new contractual framework, including the reduction of contractual notice period from 24 to 12 calendar months. However, in order to honour certain aspects of their ‘old’ contractual terms, there are a number of individual features which have been retained.
In Dr Garnier’s case these include the entitlement to reimbursement of excise tax on change of control related payments, life insurance benefit funded by the company to age 65 and the following provisions relating to the vesting of long-term incentives:
Mr Coombe remains entitled on termination to the cash equivalent of 12 months benefits and continuing medical and dental insurance.
In addition, the current Executive Directors are entitled to receive one year’s worth of pension contributions on termination.
Dr Garnier’s and Mr Coombe’s contracts were executed on 3rd March 2004 and took effect from 1st January 2004. Dr Garnier’s contract will expire on 31st October 2007 and Mr Coombe’s on 31st March 2005, being the last day of the month in which they reach their 60th birthday. Dr Yamada’s contract was executed on 27th July 2004 and took effect from 1st January 2004 and expires on 30th June 2007 being the last day of the month in which he reaches his 62nd birthday.
No termination payments will be made in respect of any part of a notice period extending beyond the contract expiry dates.
Individual pension arrangementsThe UK plan provides for a pension based on two-thirds of final salary at age 60. The US cash balance plan provides for an annual contribution and interest on the sum accumulated in the cash balance plan but with no contractual promise to provide specific levels of retirement income.
GlaxoSmithKline makes annual contributions of 15 per cent of Dr Garnier’s annual salary and bonus and 18 per cent of Dr Yamada’s annual salary and bonus. The fund increases at an interest rate based on the yield on 30-year treasury bonds. The company has no liability beyond making these annual contributions.
Prior to 1999 all US-employees, including Dr Garnier and Dr Yamada, were moved from a final salary pension arrangement to the current cash balance structure. For all employees in the US, cash balance plan contributions are based on combined annual salary and annual bonus.
Mr Coombe participates in the Glaxo Wellcome defined benefit plan. On retirement at age 60, he is entitled to receive an annual pension of two-thirds of his final salary, a two–thirds widow’s pension and inflation proofing.
In 2000 all benefits accrued under the Glaxo Wellcome UK pension arrangements were augmented by the Trustees of the plans by five per cent to reflect a distribution of surplus. This augmentation will apply to that element of Mr Coombe’s pension earnings before 31st March 2000.
Other entitlementsIn addition to the contractual provisions outlined above, in the event that Dr Garnier, Dr Yamada or Mr Coombe’s service agreements are terminated by their employing company, the following would apply:
Outside appointments for Executive DirectorsAny outside appointments must be approved by the Chairman on behalf of the Board. It is the company’s policy that remuneration earned from such appointments may be kept by the individual Executive Director.
Non-Executive Director terms, conditions and fees
Non-Executive Directors of GlaxoSmithKline do not have service contracts but instead have letters of appointment. The company aims to provide Non-Executive Directors with fees that are competitive with other companies of equivalent size and complexity. During the year the Chairman (then Sir Christopher Hogg) and the CEO recommended, and the Board approved, a new fee structure effective from 1st October 2004 for the Non-Executive Directors as follows:
The fee arrangements for Sir Christopher Gent are described on page 49.
To enhance the link between Directors and shareholders and as set out in the table below, GlaxoSmithKline requires Non-Executive Directors to receive a significant part of their fees in the form of shares. With effect from 1st October 2004, at least 25 per cent of the Non-Executive Directors’ total fees are paid in the form of shares and allocated to a share account. The Non-Executive Directors may also take the opportunity to invest part or all of the balance of their fees into the same share account.
Prior to 1st October 2004, the Non-Executive Directors were allocated a number of shares, dependent on their position, as part of their fees and could elect to invest part or all the balance of fees in a share account. These shares are not paid out until the Director’s retirement from the Board, or at a later date, and are paid on the basis of dividends reinvested in the interim.
The fee arrangements prior to 1st October 2004 were as follows:
| Chairman | |||||||||||||
| Board | of a Board | Deputy | |||||||||||
| member | Committee | Chairman | Chairman | ||||||||||
| Cash fees | £45,000 | £55,000 | £80,000 | £300,000 | |||||||||
| ($72,000) | ($88,000) | ||||||||||||
| Percentage of cash fees which may be taken as shares | 100% | 50% | |||||||||||
| Maximum share | £45,000 | £55,000 | £40,000 | £150,000 | |||||||||
| election | ($72,000) | ($88,000) | |||||||||||
| Automatic share allocation | 1,000 Ordinary shares (or 500 ADSs) | 3,000 Ordinary shares (or 1,500 ADSs) | 6,000 Ordinary shares (or 3,000 ADSs) | ||||||||||
Non-Executive Directors are not entitled to compensation if their appointment is terminated.
ChairmanSir Christopher Hogg retired as Chairman with effect from 31st December 2004. Sir Christopher Hogg’s letter of appointment to the Board was dated 19th June 2000 and was amended on 1st September 2002 to record his appointment as Chairman with effect from 20th May 2002. Sir Christopher Gent’s letter of appointment to the Board was dated 26th May 2004, under which it was agreed that he serve the company as Deputy Chairman until 31st December 2004 and from 1st January 2005 as Chairman until the conclusion of the Annual General Meeting following the third anniversary of his appointment. This may be extended for a further term of three years by mutual agreement. He received fees at the rate of £240,000 per annum plus an allocation of GlaxoSmithKline shares to the value of £60,000 per annum whilst Deputy Chairman and receives £400,000 per annum plus an allocation of GlaxoSmithKline shares to the value of £100,000 per annum as Chairman.
Other Non-Executive DirectorsOn appointment, each Non-Executive Director is provided with a letter of appointment under which it is agreed that they serve the company as a Non-Executive Director until the conclusion of the Annual General Meeting following the third anniversary of their appointment. In each case this can be extended for a further term of three years by mutual agreement. No directors serve a term longer than three years without offering themselves for re-election by the shareholders.
The following table shows the date of the letter of appointment and where applicable the date of leaving the Board:
| Non-Executive Director | Date of letter of appointment | Date of leaving | ||
| Mr L Culp | 09.06.03 | – | ||
| Sir Crispin Davis | 09.06.03 | – | ||
| Sir Deryck Maughan | 26.05.04 | – | ||
| Sir Ian Prosser | 19.06.00 | – | ||
| Dr R Schmitz | 19.06.00 | – | ||
| Dr L Shaprio | 19.06.00 | – | ||
| Sir Robert Wilson | 09.06.03 | – | ||
| Dr M Barzach | 19.06.00 | 17.05.04 | ||
| Sir Peter Job | 19.06.00 | 31.12.04 | ||
| Mr J McArthur | 19.06.00 | 17.05.04 | ||
| Mr D McHenry | 19.06.00 | 17.05.04 | ||
TSR performance graphThe following graph sets out the performance of the company relative to the FTSE 100 index of which the company is a constituent and to the performance comparator group since the merger on 27th December 2000. The graph has been prepared in accordance with the Regulations and is not an indication of the likely vesting of awards granted under any of the company’s incentive plans.
Directors and Senior Management remuneration
The following tables set out for the Directors of GlaxoSmithKline plc the remuneration earned in 2004; their interests in shares of GlaxoSmithKline plc; their interests in share options and incentive plans and their pension benefits. The members of the CET and the Company Secretary, known as the Senior Management, also participate in the same remuneration plans as the Executive Directors and the aggregate remuneration and interests of the Directors and Senior Management are also provided.
Annual remuneration
| 2004 | 2003 | |||||||||||||||||
| Total | Total | |||||||||||||||||
| Fees and | Other | Annual | annual | Fees and | Other | Annual | annual | |||||||||||
| salary | benefits | bonus | remuneration | salary | benefits | bonus | remuneration | |||||||||||
| Footnote | 000 | 000 | 000 | 000 | 000 | 000 | 000 | 000 | ||||||||||
| Executive Directors | ||||||||||||||||||
| Dr JP Garnier | a,b,c | $1,523 | $786 | $2,250 | $4,559 | $1,502 | $633 | $2,435 | 4,570 | |||||||||
| Dr T Yamada | b,c | $725 | $577 | $1,001 | $2,303 | – | – | – | – | |||||||||
| Mr J Coombe | b,c,d | £506 | £9 | – | £515 | £490 | £17 | £730 | £1,237 | |||||||||
| Total Executive Directors | £1,734 | £754 | £1,777 | £4,265 | £1,406 | £403 | £2,215 | £4,024 | ||||||||||
| Current Non-Executive Directors | ||||||||||||||||||
| Mr L Culp | $97 | – | – | $97 | $48 | – | – | $48 | ||||||||||
| Sir Deryck Maughan | $57 | – | – | $57 | – | – | – | – | ||||||||||
| Dr L Shapiro | e | $182 | – | – | $182 | $179 | – | – | $179 | |||||||||
| Sir Christopher Gent | £175 | – | – | £175 | – | – | – | – | ||||||||||
| Sir Crispin Davis | £57 | – | – | £57 | £29 | – | – | £29 | ||||||||||
| Sir Ian Prosser | £65 | – | – | £65 | £66 | – | – | £66 | ||||||||||
| Dr R Schmitz | £72 | – | – | £72 | £67 | – | – | £67 | ||||||||||
| Sir Robert Wilson | £66 | – | – | £66 | £10 | – | – | £10 | ||||||||||
| Total Current Non-Executive Directors | £618 | – | – | £618 | £310 | – | – | £310 | ||||||||||
| Former Non-Executive Directors | ||||||||||||||||||
| Mr J McArthur | $42 | $18 | – | $60 | $102 | – | – | $102 | ||||||||||
| Mr D McHenry | $42 | – | – | $42 | $106 | – | – | $106 | ||||||||||
| Mr P Allaire | – | – | – | – | £28 | – | – | £28 | ||||||||||
| Dr M Barzach | f | £78 | – | – | £78 | £107 | – | – | £107 | |||||||||
| Sir Christopher Hogg | £369 | £1 | – | £370 | £374 | – | – | £374 | ||||||||||
| Sir Roger Hurn | – | – | – | – | £50 | – | – | £50 | ||||||||||
| Sir Peter Job | £57 | – | – | £57 | £57 | – | – | £57 | ||||||||||
| Sir Richard Sykes | a,g | – | £1 | – | £1 | – | £958 | – | £958 | |||||||||
| Total Former Non-Executive Directors | £550 | £12 | – | £562 | £743 | £958 | – | £1,701 | ||||||||||
| Total Non-Executive Directors | £1,168 | £12 | – | £1,180 | £1,053 | £958 | – | £2,011 | ||||||||||
| Total remuneration | £2,902 | £766 | £1,777 | £5,445 | £2,459 | £1,361 | £2,215 | £6,035 | ||||||||||
Non-Executive Directors’ remuneration
| 2004 | 2003 | |||||||||||
| Total | Cash | Shares/ADSs | Total | Cash | Shares/ADSs | |||||||
| Fees and salary | 000 | 000 | 000 | 000 | 000 | 000 | ||||||
| Current Non-Executive Directors | ||||||||||||
| Mr L Culp | $97 | – | $97 | $48 | – | $48 | ||||||
| Sir Deryck Maughan | $57 | – | $57 | – | – | – | ||||||
| Dr L Shapiro | $97 | $75 | $22 | $93 | $72 | $21 | ||||||
| Sir Christopher Gent | £175 | £140 | £35 | – | – | – | ||||||
| Sir Crispin Davis | £57 | – | £57 | £29 | – | £29 | ||||||
| Sir Ian Prosser | £65 | £28 | £37 | £66 | £27 | £39 | ||||||
| Dr R Schmitz | £72 | £38 | £34 | £67 | £33 | £34 | ||||||
| Sir Robert Wilson | £66 | £52 | £14 | £10 | £8 | £2 | ||||||
| Former Non-Executive Directors | ||||||||||||
| Mr J McArthur | $42 | $37 | $5 | $101 | $80 | $21 | ||||||
| Mr D McHenry | $42 | $37 | $5 | $106 | $85 | $21 | ||||||
| Mr P Allaire | – | – | – | £28 | £25 | £3 | ||||||
| Dr M Barzach | £22 | £19 | £3 | £57 | £45 | £12 | ||||||
| Sir Christopher Hogg | £369 | £150 | £219 | £374 | £150 | £224 | ||||||
| Sir Roger Hurn | – | – | – | £50 | £32 | £18 | ||||||
| Sir Peter Job | £57 | – | £57 | £57 | – | £57 | ||||||
| Total | £1,066 | £508 | £558 | £951 | £465 | £486 | ||||||
The table above sets out the remuneration received as Non-Executive Directors of GlaxoSmithKline. Accordingly, it does not include Dr Barzach’s fees received from GlaxoSmithKline France for healthcare consultancy provided or Dr Shapiro’s fees received as a member of GlaxoSmithKline’s Scientific Advisory Board.
From 1st January until 30th September 2004, Non-Executive Directors were required to receive part of their fees in the form of shares or ADSs, with the balance received in cash. From 1st October 2004 until 31st December 2004, the Non-Executive Directors were required to take at least 25 per cent of their total fees in the form of shares allocated to a share account. In both cases they could then elect to receive either all or part of the cash payment in the form of further shares or ADSs. The total value of these shares and ADSs as at the date of award, together with the cash payment, forms their total fees, which are included within the Annual remuneration table under ‘Fees and salary’. The table above sets out the value of their fees received in the form of cash and shares and ADSs.
The shares and ADSs are notionally awarded to the Non-Executive Directors and allocated to their interest accounts and are included within the Directors’ interests tables on page 53. The accumulated balance of these shares and ADSs, together with notional dividends subsequently reinvested, are not paid out to the Non-Executive Directors until retirement. Upon retirement, the Non-Executive Directors will receive either the shares and ADSs or a cash amount equal to the value of the shares and ADSs at the date of retirement.
The table below sets out the accumulated number of shares and ADSs held by each Non-Executive Director as at 31st December 2004 together with the movements in their account over the year.
| Number of shares and ADSs | ||||||||||||
| Dividends | ||||||||||||
| Non-Executive Directors’ share arrangements | At 31.12.03 | Allocated | Elected | reinvested | Paid out | At 31.12.04 | ||||||
| Current Non-Executive Directors | ||||||||||||
| Sir Christopher Gent | – | – | 2,918 | 3 | – | 2,921 | ||||||
| Mr L Culp - ADSs | 1,061 | 375 | 1,868 | 44 | – | 3,348 | ||||||
| Sir Crispin Davis | 2,272 | 750 | 4,208 | 103 | – | 7,333 | ||||||
| Sir Deryck Maughan | – | 125 | 1,123 | – | – | 1,248 | ||||||
| Sir Ian Prosser | 9,030 | 750 | 2,411 | 329 | – | 12,520 | ||||||
| Dr R Schmitz | 7,550 | 750 | 2,194 | 277 | – | 10,771 | ||||||
| Dr L Shapiro - Shares | 1,619 | – | – | 57 | – | 1,676 | ||||||
| - ADSs | 2,045 | 375 | 144 | 44 | – | 2,608 | ||||||
| Sir Robert Wilson | 167 | 750 | 409 | 11 | – | 1,337 | ||||||
| Former Non-Executive Directors | ||||||||||||
| Dr M Barzach | 3,109 | 250 | – | – | 3,359 | – | ||||||
| Sir Christopher Hogg | 27,929 | 6,000 | 13,003 | 1,068 | – | 48,000 | ||||||
| Sir Roger Hurn | 12,163 | – | – | 422 | 1,280 | 11,305 | ||||||
| Sir Peter Job | 12,228 | 750 | 4,208 | 452 | – | 17,638 | ||||||
| Mr J McArthur - ADSs | 2,084 | 125 | – | – | 2,209 | – | ||||||
| Mr D McHenry - ADSs | 2,045 | 125 | – | – | 2,170 | – | ||||||
| Mr J Young - Shares | 1,978 | – | – | – | 1,978 | – | ||||||
| - ADSs | 1,014 | – | – | – | 1,014 | – | ||||||
The table below sets out the settlement of former Non-Executive Directors’ share arrangements on their leaving the Board:
| Value of awards | Value of awards | Payments | ||||||
| Date of leaving | allocation | leaving (a) | in 2004 (b) | |||||
| 2004 | ||||||||
| Dr M Barzach | 17.05.04 | £47,032 | £40,390 | £40,390 | ||||
| Sir Christopher Hogg | 31.12.04 | £565,857 | £586,559 | – | ||||
| Sir Peter Job | 31.12.04 | £225,360 | £215,538 | – | ||||
| Mr J McArthur | 17.05.04 | $99,880 | $94,861 | $94,861 | ||||
| Mr D McHenry (d) | 17.05.04 | $98,556 | $93,187 | $93,187 | ||||
| Prior years | ||||||||
| Sir Roger Hurn (c) | 05.06.03 | £14,806 | ||||||
| Mr J Young (c) | 20.05.02 | $85,063 | ||||||
Directors’ interests
The following beneficial interests of the Directors of the company are shown in the register maintained by the company in accordance with the Companies Act 1985:
| Shares | ADSs | |||||||||||||
| 25th February | 31st December | 1st January | 25th February | 31st December | 1st January | |||||||||
| Footnote | 2005 | 2004 | 2004 | 2005 | 2004 | 2004 | ||||||||
| Dr JP Garnier | a | – | – | – | 224,847 | 204,430 | 113,858 | |||||||
| Mr J Coombe | b | 198,629 | 186,652 | 173,911 | – | – | – | |||||||
| Dr T Yamada | a | – | – | – | 66,832 | 60,923 | 52,930 | |||||||
| Sir Christopher Gent | c,d | 2,921 | 2,921 | – | – | – | – | |||||||
| Mr L Culp | c | – | – | – | 3,348 | 3,348 | 1,061 | |||||||
| Sir Crispin Davis | c | 12,500 | 12,500 | 7,439 | – | – | – | |||||||
| Sir Christopher Hogg | c,e | 52,667 | 32,450 | – | – | – | ||||||||
| Sir Peter Job | c,e | 19,925 | 14,482 | – | – | – | ||||||||
| Sir Deryck Maughan | c,d | – | – | – | 1,248 | 1,248 | – | |||||||
| Sir Ian Prosser | c | 13,430 | 13,430 | 9,940 | – | – | – | |||||||
| Dr R Schmitz | c | 10,771 | 10,771 | 7,550 | 2,840 | 2,840 | 2,840 | |||||||
| Dr L Shapiro | c | 1,676 | 1,676 | 1,619 | 6,276 | 5,958 | 4,709 | |||||||
| Sir Robert Wilson | c | 2,465 | 2,465 | 1,295 | – | – | – | |||||||
| Share options | |||||||||||||
| Options – ADSs | Granted | ||||||||||||
| At 31.12.03 | Date of grant | Exercise period | Grant price | Number | Exercised | At 31.12.04 | |||||||
| Dr JP Garnier | 3,615,700 | 02.12.04 | 02.12.07 - 01.12.14 | $43.73 | 460,000 | 231,052 | 3,844,648 | ||||||
| Dr T Yamada | 1,085,358 | 02.12.04 | 02.12.07 - 01.12.14 | $43.73 | 138,000 | – | 1,223,358 | ||||||
| Options – Shares | Granted | ||||||||||||
| At 31.12.03 | Date of grant | Exercise period | Grant price | Number | Exercised | At 31.12.04 | |||||||
| Mr J Coombe | 1,434,249 | n/a | n/a | n/a | n/a | – | 1,434,249 | ||||||
For those options outstanding at 31st December 2004, the earliest and latest vesting and lapse dates for those above and below the market price for a GlaxoSmithKline share at the year end are given in the table below. Mr Coombe was excluded from the grant of options on 2nd December 2004, as he retires from the company within 12 months of the date of the grant.
| Vesting date | Lapse date | ||||||||||||
| Weighted average | |||||||||||||
| Dr JP Garnier | grant price | Number | earliest | latest | earliest | latest | |||||||
| Above market price (“underwater”) at year end: | vested options | $55.99 | 2,033,448 | 23.11.01 | 28.11.04 | 22.11.08 | 27.11.11 | ||||||
| $55.99 | 2,033,448 | ||||||||||||
| Below market price at year end: | vested options | $34.00 | 441,200 | 15.11.98 | 13.11.00 | 14.11.05 | 12.11.07 | ||||||
| unvested options | $41.88 | 1,370,000 | 03.12.05 | 02.12.07 | 02.12.12 | 01.12.14 | |||||||
| $39.96 | 1,811,200 | ||||||||||||
| Total ADS options as at 31st December 2004 | $48.44 | 3,844,648 | |||||||||||
| Vesting date | Lapse date | ||||||||||||
| Weighted average | |||||||||||||
| Dr T Yamada | grant price | Number | earliest | latest | earliest | latest | |||||||
| Above market price (“underwater”) at year end: | vested options | $56.35 | 660,591 | 23.11.01 | 28.11.04 | 22.11.08 | 27.11.11 | ||||||
| $56.35 | 660,591 | ||||||||||||
| Below market price at year end: | vested options | $29.07 | 141,767 | 25.03.99 | 13.11.00 | 24.03.06 | 12.11.07 | ||||||
| unvested options | $41.77 | 421,000 | 03.12.05 | 02.12.07 | 02.12.12 | 01.12.14 | |||||||
| $38.57 | 562,767 | ||||||||||||
| Total ADS options as at 31st December 2004 | $48.17 | 1,223,358 | |||||||||||
| Vesting date | Lapse date | ||||||||||||
| Weighted average | |||||||||||||
| Mr J Coombe | grant price | Number | earliest | latest | earliest | latest | |||||||
| Above market price (“underwater”) at year end: | vested options | £16.97 | 867,218 | 04.08.02 | 28.11.04 | 03.08.09 | 27.11.11 | ||||||
| unvested options | £12.70 | 276,000 | 15.12.06 | 15.12.06 | 14.12.13 | 14.12.13 | |||||||
| £15.94 | 1,143,218 | ||||||||||||
| Below market price at year end: | unvested options | £11.78 | 291,031 | 01.12.05 | 03.12.05 | 31.05.06 | 02.12.12 | ||||||
| £11.78 | 291,031 | ||||||||||||
| Total share options as at 31st December 2004 | £15.10 | 1,434,249 | |||||||||||
GlaxoSmithKline grants share options to Executive Directors and Senior Managers on an annual basis, generally in November. An initial grant was made following completion of the merger in March 2001. The measurement period for the options granted in March 2001 commenced on 1st January 2001. The measurement periods for options granted in November 2001 and 2002 and December 2003 and 2004 commenced on 1st January 2002, 2003, 2004 and 2005, respectively. The Directors hold these options under the various share option plans referred to in Note 36 to the Financial statements, ‘Employee share schemes’. None of the other Directors had an interest in any option over the company’s shares.
Following the merger, each of the Directors above elected to exchange their outstanding options in the legacy share option plans for options over GlaxoSmithKline shares. These Directors, and all other participants in those legacy schemes who made such an election, will receive an additional benefit of a cash sum equal to 10 per cent of the grant price of the original option. This additional benefit will be given when the new option is exercised or lapses.
Prior to 2003 only those share options granted to Executive Directors were subject to a performance condition. In order for the options to vest in full, business performance EPS growth, excluding currency and exceptional items, had on average to be at least three percentage points per annum more than the increase in the UK Retail Prices Index over any three-year performance period.
The options granted to Executive Directors in 2003 were subject to the performance conditions as described on pages 46 to 47.
In respect of the 2003 grant, if the performance condition is not met after the three-year measurement period, the performance will be measured again over the four financial years following the date of grant of the options. If the performance condition is not met at the end of four years, the option will lapse.
The options granted to the Executive Directors in 2004 were subject to the same performance condition as set in 2003, but to the extent that the performance conditions have not been met at the end of the three-year performance period, the option will lapse with no retesting being permitted.
| Options exercised | 2004 | 2003 | ||||||||||||||
| Date | Number | Grant price | Market price | Gain | Gain | |||||||||||
| Dr JP Garnier | 19.02.04 | 231,052 | $14.53 | $43.19 | $6,621,049 | $5,079,506 | ||||||||||
At the average exchange rate for the year, the above gain made by Dr Garnier amounted to £3,618,060. An EOI benefit of $335,730 (£183,459) was paid to Dr Garnier on exercise of these options, this benefit has been included in the table on page 50. On 14th February 2005, Dr Garnier exercised 79,054 options with an exercise price of $22.07 giving rise to a gain of $2,029,561. Dr Garnier also received $174,472 in respect of the Exchange Offer Incentive benefit arising on the exercise of these options.
Mr Coombe did not exercise any share options during 2004 or 2003. Dr Yamada did not exercise any options during 2004.
The highest and lowest closing prices during the year ended 31st December 2004 for GlaxoSmithKline shares were £12.99 and £10.42, respectively. The highest and lowest prices for GlaxoSmithKline ADSs during the year ended 31st December 2004 were $47.50 and $39.04, respectively. The market price for a GlaxoSmithKline share on 31st December 2004 was £12.22 (31st December 2003 – £12.80) and for a GlaxoSmithKline ADS was $47.39 (31st December 2003 – $46.62). The prices on 25th February 2005 were £12.62 per GlaxoSmithKline share and $48.64 per GlaxoSmithKline ADS.
Incentive plans
Performance Share Plan awards
| Dr JP Garnier – ADS | |||||||||||||||||||||||||
| Performance period | Market | Vested & exercised | Additional | ||||||||||||||||||||||
| Number | price on | ADS by | Vested & | ||||||||||||||||||||||
| Unvested | granted | date of | Vested & | Market | dividends | Unvested | deferred | ||||||||||||||||||
| at 31.12.03 | in 2004 | grant | deferred | Number | price | Gain | Lapsed | reinvested | at 31.12.04 | at 31.12.04 | |||||||||||||||
| 01.01.01 – 31.12.03 | 70,000 | – | $ | 51.30 | 34,492 | 508 | $43.39 | $22,042 | 35,000 | 1,023 | – | 35,515 | |||||||||||||
| 01.01.02 – 31.12.04 | 70,000 | – | $ | 51.95 | – | – | – | – | – | – | 70,000 | – | |||||||||||||
| 01.01.03 – 31.12.05 | 70,000 | – | $ | 37.25 | – | – | – | – | – | – | 70,000 | – | |||||||||||||
| 01.01.04 – 31.12.06 | 200,000 | – | $ | 44.57 | – | – | – | – | – | 5,990 | 205,990 | – | |||||||||||||
| 01.01.05 – 31.12.07 | – | 200,000 | $ | 43.73 | – | – | – | – | – | – | 200,000 | – | |||||||||||||
The value of awards deferred by Dr Garnier at vesting was $1,496,608.
| Dr T Yamada – ADS | |||||||||||||||||||||||
| Performance period | Market | Vested & exercised | Additional | ||||||||||||||||||||
| Number | price on | ADS by | |||||||||||||||||||||
| Unvested | granted | date of | Vested & | Market | dividends | Unvested | |||||||||||||||||
| at 31.12.03 | in 2004 | grant | deferred | Number | price | Gain | Lapsed | reinvested | at 31.12.04 | ||||||||||||||
| 01.01.01 – 31.12.03 | 20,000 | – | $ | 51.30 | – | 10,000 | $ | 43.39 | $ | 433,900 | 10,000 | – | – | ||||||||||
| 01.01.02 – 31.12.04 | 20,000 | – | $ | 51.95 | – | – | – | – | – | – | 20,000 | ||||||||||||
| 01.01.03 – 31.12.05 | 20,000 | – | $ | 37.25 | – | – | – | – | – | – | 20,000 | ||||||||||||
| 01.01.04 – 31.12.06 | 60,000 | – | $ | 44.57 | – | – | – | – | – | 1,797 | 61,797 | ||||||||||||
| 01.01.05 – 31.12.07 | – | 60,000 | $ | 43.73 | – | – | – | – | – | – | 60,000 | ||||||||||||
| Mr J Coombe – Shares | |||||||||||||||||||||||
| Performance period | Market | Vested & exercised | Additional | ||||||||||||||||||||
| Number | price on | ADS by | |||||||||||||||||||||
| Unvested | granted | date of | Vested & | Market | dividends | Unvested | |||||||||||||||||
| at 31.12.03 | in 2004 | grant | deferred | Number | price | Gain | Lapsed | reinvested | at 31.12.04 | ||||||||||||||
| 01.01.01 – 31.12.03 | 40,000 | – | $ | 17.93 | – | 20,000 | $ | 11.30 | $ | 226,000 | 20,000 | – | – | ||||||||||
| 01.01.02 – 31.12.04 | 40,000 | – | $ | 18.15 | – | – | – | – | – | – | 40,000 | ||||||||||||
| 01.01.03 – 31.12.05 | 40,000 | – | $ | 11.79 | – | – | – | – | – | – | 40,000 | ||||||||||||
| 01.01.04 – 31.12.06 | 120,000 | – | $ | 12.70 | – | – | – | – | – | 3,622 | 123,622 | ||||||||||||
At the average exchange rate for the year, the above gains by Dr Garnier and Dr Yamada amounted to £12,045 and £236,612, respectively. Mr Coombe was excluded from the grant of awards made on 2nd December 2004 as he retires from the company within 12 months of the date of the grant.
The Performance Share Plan (PSP) is a medium-term incentive scheme introduced during 2001. The PSP replaces the Long-Term Incentive Plan and the Mid-Term Incentive Plan operated respectively by Glaxo Wellcome and SmithKline Beecham.
Under the terms of the PSP the number of shares actually vesting is determined following the end of the relevant three-year measurement period and is dependent on GlaxoSmithKline’s performance during that period as described on page 46. The share awards are granted annually in November or December and the measurement period commences on the following 1st January, ending after three years on 31st December. The three-year measurement period for the awards with a performance period commencing 1st January 2002, ended on 31st December 2004. Based on the performance of GlaxoSmithKline during that period, 50 per cent of the award vested in February 2005. Beginning with the award with a performance period beginning on 1st January 2004, dividends are reinvested on the PSPs awarded to members of the CET. Under the terms of the PSP, US participants may defer receipt of all or part of their vested awards.
Dr Garnier elected to defer receipt of 34,492 of his awards that vested in 2004 until retirement.
Prior to the performance period beginning 1st January 2004, awards were in two parts: half can be earned by reference to GlaxoSmithKline’s TSR performance compared to the FTSE 100, of which the company is a constituent, and the other half of the award is deliverable if the company’s business performance EPS growth, excluding currency and exceptional items, is on average at least three percentage points per annum more than the increase in the UK Retail Prices Index over the three-year performance period. For these awards, if GlaxoSmithKline is ranked in the top 20 of the FTSE 100 based on TSR performance, then all of the shares in this part of the award will vest. For the 50th position in the FTSE 100, 40 per cent of the shares will vest. If GlaxoSmithKline is ranked below 50th position, none of the shares, subject to this part of the award, will vest. Between the 20th and 50th positions, vesting will occur on a sliding scale.
The following vesting table applies to the awards with a performance period from 1st January 2004 to 31st December 2006.
| TSR rank with 14 companies & GlaxoSmithKline* | Percentage of award vesting** | ||
| 1 | 100% | ||
| 2 | 100% | ||
| 3 | 90% | ||
| 4 | 80% | ||
| 5 | 70% | ||
| 6 | 60% | ||
| 7 | 50% | ||
| Median | 35% | ||
| Below median | 0% | ||
|
| Mid-Term Incentive Plan – ADSs | Vested and deferred participations at 31.12.03 | Dividends reinvested in 2004 | Vested and deferred participations at 31.12.04 | |||
| Dr JP Garnier | 157,424 | 5,714 | 163,138 | |||
The Mid-Term Incentive Plan (MTIP) was a share award scheme operated by SmithKline Beecham. The plan closed to new entrants upon completion of the merger and no further participations have been granted.
Where a final award of ADSs is made, receipt of the award may be deferred by a Director. Dr Garnier deferred receipt of the full amounts vested in 1999, 2000, 2001, 2002 and 2003. The deferred awards, together with any additional ADSs subsequently received through dividend reinvestment, are not included in the Directors’ interests table on page 53 since they are retained in the MTIP until paid out.
| Stock Appreciation Rights (SARs) – ADSs | At 31.12.03 | At 31.12.04 | Average grant price | ||||
| Dr L Shapiro | 1,487 | 1,487 | $50.34 | ||||
All SARs held by Dr Shapiro have a grant price above the market price of a GlaxoSmithKline ADS at year end.
Dr Shapiro is a member of GlaxoSmithKline’s Scientific Advisory Board (SAB). Dr Shapiro was a member of SmithKline Beecham’s SAB from 1993 until the completion of the merger with Glaxo Wellcome. Along with other members of the SAB, she received annual grants of SmithKline Beecham SARs which, in general, vested three years from the date of grant and will expire 10 years from the date of grant. Grants of SARs to SAB members ceased in 1999.
SARs entitle the holder to a cash sum at a future date based on share price growth between the date of grant and the date of exercise. Full provision is made in the financial statements for accrued gains on SARs from the date of grant. In connection with the merger, all previously granted SARs became immediately exercisable.
Pensions
The accrued annual pension benefits and transfer values for Executive Directors on retirement are set out below.
The regulations require disclosure of: the accrued benefit at the end of the year; the change in accrued benefit over the year; the transfer value at both the beginning and end of the year, and the change in the transfer value over the year. The Listing Rules require additional disclosure of the change in accrued benefit net of inflation and the transfer value of this change.
| Accrued benefit at 31.12.03 000 pa | Accrued benefit at 31.12.04 000 pa | Change in accrued benefit over year 000 pa | Transfer value at 31.12.03 000 | Transfer value at 31.12.04 000 | Change over year in transfer value* 000 | Change in accrued benefit over year net of inflation 000 pa | Transfer value of change in accrued benefit* 000 | |||||||||||
| Dr JP Garnier | $1,012 | $1,040 | $28 | $10,089 | $11,638 | $1,549 | $(8 | ) | $1,549 | |||||||||
| Mr J Coombe | £317 | £345 | £28 | £6,436 | £7,666 | £1,230 | £19 | £432 | ||||||||||
| Dr T Yamada | $155 | $165 | $10 | $1,044 | $1,264 | $220 | $5 | $220 | ||||||||||
Pensions for the Executive Directors have been disclosed in the currency in which the pension is payable.
Dr Garnier and Dr Yamada are members of the all employee US cash balance pension plan, under which GlaxoSmithKline makes annual contributions calculated as a percentage of the employee’s base salary and bonus. The fund increases at an interest rate set annually in advance based on the 30-year treasury bond rate to provide a cash sum at retirement. This cash sum is used to purchase a pension at retirement based on the annuity rates applicable at that time. Neither has entitlement to a spouse’s pension or to pension increases, other than by reducing their own initial pension.
The normal retirement age under this plan is 65 years of age. Dr Garnier’s pension arrangements have been brought into line with the terms of his service agreement and the assumed retirement age reduced to 60. Similarly Dr Yamada’s assumed retirement age has been reduced to 62.
The transfer value, or cash sum, of Dr Garnier’s plan has increased by $1,548,679 over the year as a result of phased transfers from a previous scheme, the further accumulation of interest and contributions paid by the company.
The transfer value, or cash sum, of Dr Yamada’s plan has increased by $220,097 over the year as a result of the further accumulation of interest and contributions paid by the company.
Dr Garnier and Dr Yamada are also members of the US Retirement Savings Plan, a money purchase scheme open to all US employees. Contributions are invested in a range of funds and the value of the accumulated funds are paid at retirement. During 2004 contributions of £36,160 ($66,173) were paid into this scheme by the company in respect of Dr Garnier, of which £2,240 ($4,100) was invested in GlaxoSmithKline shares in a stock ownership account. In respect of Dr Yamada, contributions of £44,840 ($82,057) were paid into the scheme of which £2,240 ($4,100) was invested in GlaxoSmithKline shares in a stock ownership account. The shares held in this account are included within the Director’s interests tables on page 53.
Mr Coombe’s transfer value has been calculated on the basis of actuarial advice in accordance with Actuarial Guidance Note GN11. The transfer value represents the present value of future payments to be made under the pension plan. Whilst Mr Coombe’s annual accrued benefit has increased by £28,206 (£19,324 excluding the effects of inflation), the transfer value has increased by £1,230,000 over the year.
This increase has arisen primarily as a result of the following factors:
Mr Coombe has waived his 2004 annual bonus of £650,370 and 2001 special deferred bonus of £383,924. The company will make a contribution to the pension plan in 2005 of £1,034,294 to enhance his pension benefits.
In 2003, a discretionary increase was applied to the UK Pension Plan uplifting the increase from the UK Retail Price Index level of 2.8% to 3% for all plan members. As a result, Sir Richard Sykes received a discretionary increase of £1,265 in his accrued benefit in 2004.
Directors and Senior Management
For US reporting purposes, it is necessary to provide information on compensation and interests of Directors and Senior Management as a group (‘the group’). For the purposes of this disclosure, the group is defined as the Directors, members of the CET and the Company Secretary. In respect of the financial year 2004, the total compensation paid to members of the group for the periods during which they served in that capacity was £13,113,720, the aggregate increase in accrued pension benefits was £49,681 and the aggregate payment to defined contribution schemes was £306,589. During 2004 members of the group were granted options over 478,650 shares and 1,206,750 ADSs and awarded 216,709 shares, 540,849 ADSs in the Performance Share Plan and 3,160 shares in the Restricted Share Plan. At 25th February 2005, the then-current members of the group (comprising 23 persons) owned 552,787 shares and 476,357 ADSs, constituting less than one per cent of the issued share capital of the company. The group also held, at that date: options to purchase 5,249,150 shares and 7,813,443 ADSs; 715,252 shares and 1,239,292 ADSs awarded under the Performance Share Plan, including those shares and ADSs that are vested and deferred; 4,188 shares and 235,845 ADSs under the legacy SmithKline Beecham Mid-Term Incentive Plan, including those shares and ADSs that are vested and deferred; 1,487 ADSs awarded under the legacy SmithKline Beecham Stock Appreciation Rights and 3,160 shares awarded under the Restricted Share Plan. These holdings were issued under the various executive share option plans described in Note 36 to the Financial statements, ‘Employee share schemes’.
Directors’ interests in contracts
Except as described in Note 32 to the Financial statements, ‘Related party transactions’, during or at the end of the financial year no Director or connected person had any material interest in any contract of significance in relation to the Group’s business with a Group company.
The Directors’ Remuneration Report has been approved by the Board of Directors and signed on its behalf by
Sir Christopher GentChairman2nd March 2005
| |
Financial trends and ratios
| Statutory results | 2004 £m | Growth | 2003 (restated) £m | Growth | 2002 (restated) £m | ||||||||||
| CER% | £% | CER% | £% | ||||||||||||
| Turnover - | Pharmaceuticals | 17,146 | 1 | (6 | ) | 18,181 | 5 | 1 | 17,995 | ||||||
| - | Consumer Healthcare | 3,213 | 3 | (1 | ) | 3,260 | 4 | 1 | 3,217 | ||||||
| Total | 20,359 | 1 | (5 | ) | 21,441 | 5 | 1 | 21,212 | |||||||
| Cost of sales | (4,309 | ) | (1 | ) | (5 | ) | (4,544 | ) | – | (1 | ) | (4,609 | ) | ||
| Selling, general and administration | (7,061 | ) | (2 | ) | (7 | ) | (7,597 | ) | (2 | ) | (5 | ) | (8,023 | ) | |
| Research and development | (2,839 | ) | 7 | 2 | (2,791 | ) | (1 | ) | (4 | ) | (2,900 | ) | |||
| Trading profit | 6,150 | 5 | (6 | ) | 6,509 | 21 | 15 | 5,680 | |||||||
| Profit before taxation | 6,119 | 8 | (3 | ) | 6,313 | 20 | 14 | 5,524 | |||||||
| Earnings | 4,302 | 7 | (4 | ) | 4,478 | 19 | 14 | 3,930 | |||||||
| Basic earnings per share (pence) | 75.0 | p | 8 | (3 | ) | 77.1 | p | 22 | 16 | 66.5 | p | ||||
| Merger, restructuring and disposal of subsidiaries | |||||||||||||||
| Cost of sales | – | (356 | ) | (366 | ) | ||||||||||
| Selling, general and administration | – | (18 | ) | (498 | ) | ||||||||||
| Research and development | – | (21 | ) | (168 | ) | ||||||||||
| Trading profit | – | (395 | ) | (1,032 | ) | ||||||||||
| Profit before taxation | – | (390 | ) | (1,011 | ) | ||||||||||
| Earnings | – | (281 | ) | (712 | ) | ||||||||||
| Business performance results | |||||||||||||||
| Turnover | 20,359 | 1 | (5 | ) | 21,441 | 5 | 1 | 21,212 | |||||||
| Cost of sales | (4,309 | ) | 7 | 3 | (4,188 | ) | – | (1 | ) | (4,243 | ) | ||||
| Selling, general and administration | (7,061 | ) | (2 | ) | (7 | ) | (7,579 | ) | 4 | – | (7,525 | ) | |||
| Research and development | (2,839 | ) | 8 | 2 | (2,770 | ) | 4 | 1 | (2,732 | ) | |||||
| Trading profit | 6,150 | (1 | ) | (11 | ) | 6,904 | 8 | 3 | 6,712 | ||||||
| Profit before taxation | 6,119 | 2 | (9 | ) | 6,703 | 8 | 3 | 6,535 | |||||||
| Adjusted earnings | 4,302 | 1 | (10 | ) | 4,759 | 7 | 5 | 4,642 | |||||||
| Adjusted earnings per share (pence) | 75.0 | p | 2 | (9 | ) | 82.0 | p | 10 | 4 | 78.5 | p | ||||
| Research and development – Statutory | |||||||||||||||
| Pharmaceuticals | 2,730 | 2,704 | 2,791 | ||||||||||||
| Consumer Healthcare | 109 | 87 | 109 | ||||||||||||
| Total | 2,839 | 2,791 | 2,900 | ||||||||||||
| Interest | |||||||||||||||
| Net interest payable | 203 | 161 | 141 | ||||||||||||
| Interest cover | 31 times | 40 times | 40 times | ||||||||||||
| Interest cover is calculated as statutory profit before interest divided by net interest payable. | |||||||||||||||
| Tax rate | |||||||||||||||
| Business performance | 27.8% | 27.4% | 27.0% | ||||||||||||
| Statutory results | 27.8% | 27.4% | 26.5% | ||||||||||||
| Borrowings | |||||||||||||||
| Net debt | 1,984 | 1,648 | 2,335 | ||||||||||||
| Gearing | 32% | 28% | 50% | ||||||||||||
The gearing ratio is calculated as net debt as a percentage of shareholders’ funds, net debt and minority interests.
|
2004 Year
World economy
Record oil prices the continued threat of terrorism and tightened monetary policies by the major economies were features of the global economy during 2004. Despite this, there was continued strong growth in China and the USA, with signs of economic recovery in the main economies of Europe, albeit slower.
Growth in the USA was 4.4 per cent, although there were wide predictions that 2005 would see expansion kept to less than four per cent. The Federal Reserve Board raised interest rates five times during 2004 to stave off inflationary pressures. There was continued concern over the country’s budget deficit and the effect on the global economy of whatever corrective actions were to be adopted. Nevertheless, the USA remained the main driver for global growth, with strong support from Asia, despite the adverse impact of higher oil prices.
Japan’s economy declined 0.5 per cent, however a recovery in the economy is anticipated in mid-2005. Although in China, official measures to moderate the pace of the country’s economic expansion were taken, growth of over nine per cent was achieved. Emerging economies elsewhere in Asia were hit by oil price rises, although reasonable growth continued in countries such as Taiwan, Thailand and Singapore.
In the EU, GDP grew 2.3 per cent where growth in the larger economies varied from 2.8 per cent in the UK to 1.5 per cent in Germany. Interest rates were unchanged by the European Central Bank and while oil prices were expected to have an adverse impact on the main European economies in 2005, continued modest growth was predicted.
In the UK, increases in Government and consumer spending fuelled initial expansion that was dampened later by concerns about interest rates and house prices. Nevertheless the final growth rate met Government forecasts. The Bank of England raised interest rates four times during the year, but held them at 4.75 per cent as signs emerged of the slowing in the economy and as concerns about inflation receded.
Following the substantive recovery of the global equity markets in 2003, share price indices in 2004 showed subdued advances despite positive economic and corporate news through the year.
Exchange
The currencies that most influence the Group’s results are the US dollar, the Euro and the Japanese Yen.
The pound hit its highest level against the dollar for more than four years, climbing to $1.92 at the year-end, and the Euro gained one per cent against sterling and eight per cent against the dollar in 2004. This was the second consecutive year that the dollar has fallen in value against the Euro, due to the impact of continued unrest in Iraq, tension elsewhere in the world and concerns for the US economy.
World market – pharmaceuticals
Global pharmaceutical sales increased by nine per cent in 2004 to £284 billion.
World market by geographic region | Value £ bn | % of total | Growth | |||||
| CER% | £% | |||||||
| USA | 124.7 | 44 | 10 | (2 | ) | |||
| Europe | 82.3 | 29 | 8 | 8 | ||||
| Germany | 15.5 | 5 | 6 | 6 | ||||
| France | 15.0 | 5 | 8 | 8 | ||||
| UK | 10.5 | 4 | 10 | 10 | ||||
| Italy | 9.7 | 3 | 6 | 6 | ||||
| Japan | 30.9 | 11 | 3 | 1 | ||||
| Asia Pacific | 19.3 | 7 | 13 | 6 | ||||
| Latin America | 12.1 | 4 | 16 | 2 | ||||
| Middle East, Africa | 8.6 | 3 | 13 | 5 | ||||
| Canada | 6.0 | 2 | 10 | 8 | ||||
| Total | 283.9 | 100 | 9 | 2 | ||||
Growth in the US market has slowed but remains in double digits and now represents 44 per cent of the global prescription pharmaceutical market compared to 30 per cent a decade ago.
At 30th September 2004, GlaxoSmithKline held second position in the world pharmaceutical market with a market share of 6.5 per cent, behind Pfizer with a market share of 10.1 per cent. GlaxoSmithKline had eight products in the world’s top 60 pharmaceutical products; these are Augmentin, Avandia, Imigran/Imitrex, Lamictal, Seretide/Advair, Seroxat/Paxil, Wellbutrin and Zofran.
| World market – top five therapeutic classes | Value £ bn | % of total | CER% | Growth | ||||
| £% | ||||||||
| Cardiovascular | 48.3 | 17 | 9 | 3 | ||||
| Central nervous system | 47.1 | 17 | 11 | 4 | ||||
| Alimentary tract and metabolic Anti-infectives | 35.1 | 12 | 6 | (1 | ) | |||
| (bacterial, viral and fungal) excluding vaccines | 30.6 | 11 | 6 | (1 | ) | |||
| Respiratory | 19.5 | 7 | 5 | (1 | ) | |||
| (Note: data based on 12 months to 30th September 2004.) | ||||||||
Pharmaceutical turnover
All growth rates included in the review of turnover are at constant exchange rates (CER) unless otherwise stated. The sterlingSterling growth rates may be found in the tables of pharmaceutical turnover by therapeutic area on page 6337 and by geographic region on page 64.
38. Total pharmaceutical turnover in 20042007 was £17,146£19,233 million compared with £18,181£20,078 million in 2003, an increase of one per cent2006, in line with 2006 turnover at CER. In sterling terms total pharmaceutical turnover declined six per centdecreased 4%, four percentage points less than CER, principally due to the weaknessstrength of Sterling against the US dollar.
Within the Group’s portfolio, turnover of new products first launched in a major market within the last five years accounted for 30 per cent of total turnover and grew by 21 per cent to £5,130 million. Turnover of the more established, franchise products amounted to £8,767 million representing 51 per cent of total turnover and declined five per cent compared to last year. Turnover of older products, now less actively promoted, was £3,249 million, a decline of seven per cent, representing 19 per cent of total turnover.
|
2004 Yearcontinued
Global pharmaceutical turnover in the fourth quarter of 2004 increased three per cent, reflecting a US turnover increase of four per cent to £2,114 million; whereas in Europe turnover grew two per cent to £1,397 million, and in International turnover grew five per cent to £976 million. Turnover in the USA was impacted by generic competition for Wellbutrin and Paxil. Excluding sales of these products, turnover grew 10 per cent in the USA.
Pharmaceutical turnover by therapeutic area
GlaxoSmithKline’s ability to continue to deliver pharmaceuticalGSK’s turnover in 2007 was in line with 2006 as high-value growth despiteproducts were offset by lowerAvandia sales and US generic competition to several of itsCoreg IR,Flonase,Wellbutrin XL andZofran. The high-value growth products is primarily due to an exceptionally broad product portfolio of fast-growing, high-value products.includedSeretide/Advair, vaccines,Lamictal,Valtrex,Requip,Avodart andBoniva.
These include the respiratory product Seretide/Advair, up 19 per cent (£2.5 billion), the diabetes treatment Avandia/Avandamet, up 32 per cent (£1.1 billion), Lamictal for epilepsy/bipolar disorder, up 32 per cent (£0.7 billion), Valtrex for herpes (£0.6 billion), up 24 per cent, Coreg for heart disease, up 34 per cent (£0.4 billion) and vaccines, up 11 per cent (£1.2 billion).
In all, 12 GlaxoSmithKline products each had sales of over £500 million in 2004.
RespiratoryGlaxoSmithKlineGSK continues to be thea global leader in respiratory pharmaceuticals with sales of its three key products,Seretide/Advair,Flixotide/FloventandSerevent amounting to £4.4 billion, up 8%. Total sales ofSeretide/Advair, for asthma and COPD, rose 10% to £3.5 billion. In the USA, sales grew 9% to £1.9 billion. In Europe sales grew 9% to £1.2 billion and in International markets sales grew 23% to £372 million, enhanced by its launch in Japan in June.
Market share by value in the anti-asthma and COPD therapy class was 29% in Europe and 31% in the USA.
Market share by value forSeretide/Advair
GSK continues to see increased use ofSeretide/Advair, Flixotide/Flovent in the treatment of COPD and Serevent, amountingis in ongoing discussions with the FDA to £3.4 billion, up nine per cent. Salesexpand the indication for use in this patient group, including assessment of Seretide/Advair, the Group’s largest product grew 19 per cent to £2.5 billion although this contributed to declines in Serevent and Flixotide, its constituent products.data supporting a claim for reduction of exacerbations.
InCNS
CNS sales decreased 2% to £3.3 billion. Sales decreased in the USA and Europe, reflecting generic competition toAdvair Seroxat/Paxilsales grew 20 per cent to £1.3 billion. Growth of Seretide in Europe was also strong (up 18 per cent to £902 million), although reported growth in the fourth quarter was adversely impacted by a one-off rebate adjustment in Germany and wholesaler de-stocking in Italy.both regions. International sales grew 15 per cent, reflecting good6% which included 4% growth in all geographic areas.Paxil in Japan. TotalSeroxat/Paxil sales declined 6% to £553 million. TotalWellbutrin sales declined 37% to £529 million, owing to US generic competition toWellbutrin SR/IR andWellbutrin XL 300mg tablet.
The older respiratory products Sales ofVentolin Lamictal, for the treatment of epilepsy and Becotide continued to decline as patients converted to newer products.
Central nervous system (CNS)CNS sales declined 16 per cent to £3.5 billion. Sales declined in all regions.
Total sales of the Paxil franchise were down 39 per centbipolar disorder, grew 18% to £1.1 billion, as a result of generic competition to Paxil IR, sales of which declined 53 per cent to £667 million. Mitigating this decline was the strong performance of the product in Japan, up 25 per cent to £171 million and the performance of Paxil CR which generated sales of £396 million, up 14 per cent.
Total sales of Wellbutrin products fell 12 per cent to £751 million. Wellbutrin IR and SR sales fell 64 per cent to £284 million as a result of generic competition. This impact was partially offset, however, by the exceptionally strong performance of Wellbutrin XL, the new once-daily product, which achieved sales of £467 million in its first full year on the market.
The strong growth of GlaxoSmithKline’s epilepsy and bi-polar disorder treatment Lamictal continues, with sales up 32 per cent to £678 million. Ongoing US growth, up 49 per cent to £414 million, is being driven by the indication for the maintenance treatment of bi-polar disorder received last year.
Anti-viralsGlobal HIV product sales rose four per cent to £1.5 billion and sales in the USA increased four per centwhich were up 26% to £747 million. GlaxoSmithKline continues£892 million, benefiting from its new indication.Lamictal is also the only medicine with long-term clinical data that demonstrates that it can delay the onset of depressive episodes of bipolar disorder. GSK expects to grow its HIV franchise, despiterespond to the launchUS FDA’s approvable letter forLamictal XR in the middle of several new products by competitors.2008.
HIV performance was enhanced by the launchSales ofEpzicomRequip, for Parkinson’s disease and Restless Legs Syndrome (RLS), grew 36% to £346 million.Requip XL, a new combination product (Epivir/Ziagen)once-daily formulation for Parkinson’s disease, has now been approved in 13 European countries and launched in seven markets. Further European approvals are anticipated during 2008. In the USA, GSK expects a response from the FDA on its application forRequip XL during the first half of 2008.
Anti-virals
Total sales of HIV products were £1.4 billion, down 1%. Competition to older products,Combivir down 10% to £455 million andEpivirdown 20% to £156 million, was largely offset by strong sales growth of new productsEpzicom/Kivexa, which grew 39% to £324 million andLexiva/Agenerase, up 13% to £141 million. Sales ofValtrex, for herpes, rose 18% to £934 million, with US sales up 20% to £668 million driven by increased use of the product for prevention of disease transmission. Sales in August 2004Europe grew 9% to £120 million and in the EU (under the name Kivexa) in January 2005.
International grew 13% to £146 million. Sales of the herpesRelenza, an antiviral treatment Valtrex exceeded £500for flu, were £262 million (2006 – £91 million), driven primarily by one-off government orders for the first time in 2004 (up 24 per cent to £571 million). stockpiling against a possible flu pandemic.Performance is being driven by the USA (up 30 per cent to £369 million) where the product is the clear market leader in treatments for genital herpes.
Anti-bacterialsAnti-bacterial sales declined nine per cent worldwide and 24 per cent in the USA reflecting generic competition in all regions.
MetabolicThe diabetes treatments Avandia/Avandamet continue to perform very strongly, with overallIn 2007, sales of £1.1 billion (up 32 per cent).the
Sales in the USA grew 26 per cent to £852 million. Encouragingly, Avandia/Avandamet Avandiaare also growing very strongly in Europe and International markets with sales up 49 per cent and 62 per cent, respectively. Strong performance in these markets is driven by the growing acceptance amongst opinion leaders and physicians of the benefits of these new products in improving control product group, for diabetic patients.
VaccinesThe vaccines business had a strong year, with sales up 11 per centtype 2 diabetes, declined 22% to £1.2 billion. Several key products are driving growth – Pediarix/Infanrix up 12 per centIn the USA sales fell 29% to £357£780 million, Priorix up 14 per centwith fourth quarter sales down 55% to £95£130 million following publication of an article in the New England Journal of Medicine. This article suggested that there may be cardiovascular risk associated withAvandia. Despite GSK’s efforts, doctors became reluctant to start new patients onAvandiawithout further guidance from the FDA. Following clarification from the FDA in October, there is now a new approved label forAvandia. Outside the USA, sales in Europe grew 4% for the year to £227 million, and Fluarix up 38 per centin International markets, sales declined 7% to £79£212 million.
OncologyGSK recorded in turnover a £161 million share of co-promotion income forBoniva/Bonviva, a once-monthly oral bisphosphonate for the treatment of postmenopausal osteoporosis.
Vaccines
Vaccine sales increased 20% to £2.0 billion, with good performances in all regions: US sales rose 44% to £628 million; European sales grew 14% to £814 million and emesis
sales in International were up 8% to £551 million. Sales of Zofran hepatitis vaccines grew eight per cent14% to £763£529 million, driven by the US performance, up 10 per cent to £565 million.
Cardiovascular and urogenitalIn 2004, Coreg (for heart disease) sales grew 34 per cent to £432 million.
Other therapeutic areasSalesgrowth of Zantac fell 12 per cent to £273 million with declines in all regions.33%.
| 36 | GSK Annual Report 2007 |
| REPORT OF THE DIRECTORS | |
| Business review | |
| continued | |
Pharmaceutical turnover by therapeutic area 20042007
| Total | USA | Europe | International | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | Total | USA | Europe | International | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Therapeutic area/ | % of | 2004 | 2003 | Growth | 2004 | Growth | 2004 | Growth | 2004 | Growth | % of | 2007 | 2006 | Growth | 2007 | Growth | 2007 | Growth | 2007 | Growth | ||||||||||||||||||||||||||||||||||||
| major products | total | £m | £m | CER% | £% | £m | CER% | £% | £m | CER% | £% | £m | CER% | £% | total | £m | £m | CER% | £% | £m | CER% | £% | £m | CER% | £% | £m | CER% | £% | ||||||||||||||||||||||||||||
| Respiratory | 26 |  | 4,415 | 4,417 | 7 | – | 2,183 | 9 | (3 | ) | 1,538 | 5 | 4 | 694 | 4 | – | 26 | 5,032 | 4,995 | 5 | 1 | 2,377 | (3 | ) | 1,772 | 4 | 4 | 883 | 10 | |||||||||||||||||||||||||||
| Serevent, Seretide/Advair | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Flixotide/Flovent | 3,428 | 3,352 | 9 | 2 | 1,710 | 9 | (2 | ) | 1,253 | 8 | 7 | 465 | 11 | 8 | ||||||||||||||||||||||||||||||||||||||||||
| Seretide/Advair | 2,461 | 2,214 | 19 | 11 | 1,330 | 20 | 8 | 902 | 18 | 17 | 229 | 15 | 11 | 3,499 | 3,313 | 10 | 6 | 1,891 | 9 | 1 | 1,236 | 9 | 9 | 372 | 23 | 20 | ||||||||||||||||||||||||||||||
| Flixotide/Flovent | 618 | 705 | (7 | ) | (12 | ) | 251 | (12 | ) | (21 | ) | 189 | (7 | ) | (9 | ) | 178 | 2 | – | 621 | 659 | (1 | ) | (6 | ) | 284 | 3 | (5 | ) | 161 | (8 | ) | (7 | ) | 176 | (2 | ) | (6 | ) | |||||||||||||||||
| Serevent | 349 | 433 | (15 | ) | (19 | ) | 129 | (26 | ) | (34 | ) | 162 | (13 | ) | (14 | ) | 58 | 24 | 21 | 269 | 291 | (4 | ) | (8 | ) | 74 | (7 | ) | (14 | ) | 134 | (5 | ) | (4 | ) | 61 | – | (6 | ) | |||||||||||||||||
| Flixonase/Flonase | 578 | 594 | 7 | (3 | ) | 450 | 9 | (2 | ) | 59 | 7 | 5 | 69 | (5 | ) | (10 | ) | 199 | 311 | (34 | ) | (36 | ) | 72 | (60 | ) | (61 | ) | 51 | – | – | 76 | 5 | – | ||||||||||||||||||||||
| CNS | 20 |  | 3,463 | 4,455 | (16 | ) | (22 | ) | 2,271 | (19 | ) | (27 | ) | 748 | (11 | ) | (12 | ) | 444 | (7 | ) | (10 | ) | |||||||||||||||||||||||||||||||||
| Depression | 1,814 | 2,830 | (30 | ) | (36 | ) | 1,254 | (34 | ) | (40 | ) | 252 | (31 | ) | (32 | ) | 308 | (10 | ) | (13 | ) | |||||||||||||||||||||||||||||||||||
| Central nervous system | 17 | 3,348 | 3,642 | (2 | ) | (8 | ) | 2,377 | (1 | ) | (8 | ) | 513 | (14 | ) | (14 | ) | 458 | 6 | – | ||||||||||||||||||||||||||||||||||||
| Seroxat/Paxil | 1,063 | 1,877 | (39 | ) | (43 | ) | 519 | (51 | ) | (56 | ) | 251 | (31 | ) | (32 | ) | 293 | (8 | ) | (11 | ) | 553 | 620 | (6 | ) | (11 | ) | 143 | (12 | ) | (18 | ) | 122 | (19 | ) | (18 | ) | 288 | 5 | (3 | ) | |||||||||||||||
| Paxil IR | 667 | 1,490 | (53 | ) | (55 | ) | 131 | (82 | ) | (84 | ) | 251 | (31 | ) | (32 | ) | 285 | (10 | ) | (13 | ) | 400 | 448 | (6 | ) | (11 | ) | 7 | (63 | ) | (63 | ) | 122 | (19 | ) | (18 | ) | 271 | 4 | (3 | ) | |||||||||||||||
| Paxil CR | 396 | 387 | 14 | 2 | 388 | 13 | 1 | – | – | – | 8 | >100 | >100 | 153 | 172 | (4 | ) | (11 | ) | 136 | (6 | ) | (13 | ) | – | – | – | 17 | 13 | 6 | ||||||||||||||||||||||||||
| Wellbutrin | 751 | 953 | (12 | ) | (21 | ) | 735 | (12 | ) | (21 | ) | 1 | >100 | >100 | 15 | (37 | ) | (40 | ) | 529 | 900 | (37 | ) | (41 | ) | 512 | (38 | ) | (42 | ) | 4 | 100 | 100 | 13 | (13 | ) | (19 | ) | ||||||||||||||||||
| Wellbutrin IR, SR | 284 | 883 | (64 | ) | (68 | ) | 270 | (65 | ) | (69 | ) | 1 | >100 | >100 | 13 | (44 | ) | (48 | ) | 75 | 102 | (23 | ) | (26 | ) | 63 | (26 | ) | (29 | ) | 2 | – | – | 10 | - | (9 | ) | |||||||||||||||||||
| Wellbutrin XL | 467 | 70 | >100 | >100 | 465 | >100 | >100 | – | – | – | 2 | >100 | – | 454 | 798 | (39 | ) | (43 | ) | 449 | (39 | ) | (43 | ) | 2 | – | – | 3 | (40 | ) | (40 | ) | ||||||||||||||||||||||||
| Migraine | 760 | 849 | (3 | ) | (10 | ) | 527 | (3 | ) | (13 | ) | 176 | – | (2 | ) | 57 | (4 | ) | (7 | ) | ||||||||||||||||||||||||||||||||||||
| Imigran/Imitrex | 682 | 760 | (2 | ) | (10 | ) | 492 | (2 | ) | (12 | ) | 142 | (2 | ) | (3 | ) | 48 | (6 | ) | (9 | ) | 685 | 711 | 3 | (4 | ) | 558 | 9 | 1 | 89 | (25 | ) | (25 | ) | 38 | (2 | ) | (10 | ) | |||||||||||||||||
| Lamictal | 678 | 556 | 32 | 22 | 414 | 49 | 33 | 219 | 10 | 8 | 45 | 12 | 5 | 1,097 | 996 | 18 | 10 | 892 | 26 | 17 | 145 | (18 | ) | (17 | ) | 60 | 13 | 7 | ||||||||||||||||||||||||||||
| Requip | | 116 | 99 | 25 | 17 | 53 | 26 | 13 | 56 | 22 | 19 | 7 | 35 | 40 | 346 | 268 | 36 | 29 | 238 | 46 | 35 | 91 | 11 | 12 | 17 | 64 | 55 | |||||||||||||||||||||||||||||
| Anti-virals | 14 | 2,360 | 2,349 | 8 | – | 1,165 | 12 | 1 | 725 | 1 | – | 470 | 7 | 1 | 16 | 3,028 | 2,827 | 13 | 7 | 1,494 | 19 | 10 | 870 | 1 | 2 | 664 | 13 | 7 | ||||||||||||||||||||||||||||
| HIV | 1,463 | 1,508 | 4 | (3 | ) | 747 | 4 | (6 | ) | 559 | 2 | 1 | 157 | 8 | 1 | 1,442 | 1,515 | (1 | ) | (5 | ) | 637 | (2 | ) | (9 | ) | 612 | (2 | ) | (1 | ) | 193 | 5 | (1 | ) | |||||||||||||||||||||
| Combivir | 571 | 589 | 4 | (3 | ) | 280 | 4 | (7 | ) | 226 | 5 | 4 | 65 | (1 | ) | (7 | ) | 455 | 528 | (10 | ) | (14 | ) | 195 | (11 | ) | (18 | ) | 192 | (12 | ) | (12 | ) | 68 | (1 | ) | (7 | ) | ||||||||||||||||||
| Trizivir | 322 | 376 | (8 | ) | (14 | ) | 177 | (10 | ) | (19 | ) | 130 | (8 | ) | (9 | ) | 15 | 13 | 7 | 233 | 268 | (9 | ) | (13 | ) | 120 | (8 | ) | (15 | ) | 99 | (13 | ) | (12 | ) | 14 | 7 | – | ||||||||||||||||||
| Epivir | 294 | 293 | 7 | – | 139 | 4 | (6 | ) | 115 | 10 | 7 | 40 | 14 | 5 | 156 | 202 | (20 | ) | (23 | ) | 53 | (16 | ) | (23 | ) | 67 | (26 | ) | (26 | ) | 36 | (14 | ) | (16 | ) | |||||||||||||||||||||
| Ziagen | 155 | 167 | – | (7 | ) | 73 | (5 | ) | (15 | ) | 60 | (1 | ) | (2 | ) | 22 | 25 | 10 | 109 | 117 | (3 | ) | (7 | ) | 45 | 2 | (6 | ) | 37 | (10 | ) | (10 | ) | 27 | (4 | ) | (4 | ) | ||||||||||||||||||
| Retrovir | 43 | 45 | 2 | (4 | ) | 17 | – | (11 | ) | 16 | 4 | – | 10 | 3 | – | |||||||||||||||||||||||||||||||||||||||||
| Agenerase, Lexiva | 63 | 38 | 80 | 66 | 46 | >100 | 84 | 12 | 21 | 20 | 5 | 29 | 67 | 141 | 131 | 13 | 8 | 78 | 14 | 5 | 53 | 10 | 10 | 10 | 22 | 11 | ||||||||||||||||||||||||||||||
| Epzicom/Kivexa | 324 | 241 | 39 | 34 | 142 | 23 | 14 | 149 | 54 | 54 | 33 | 74 | 74 | |||||||||||||||||||||||||||||||||||||||||||
| Herpes | 718 | 669 | 15 | 7 | 380 | 31 | 17 | 138 | (5 | ) | (7 | ) | 200 | 6 | 2 | 1,041 | 965 | 15 | 8 | 678 | 20 | 11 | 151 | 4 | 5 | 212 | 6 | – | ||||||||||||||||||||||||||||
| Valtrex |  | 571 | 499 | 24 | 14 | 369 | 30 | 17 | 90 | 6 | 5 | 112 | 19 | 15 | 934 | 845 | 18 | 11 | 668 | 20 | 11 | 120 | 9 | 10 | 146 | 13 | 7 | |||||||||||||||||||||||||||||
| Zovirax | 147 | 170 | (10 | ) | (14 | ) | 11 | 38 | 22 | 48 | (21 | ) | (23 | ) | 88 | (8 | ) | (11 | ) | 107 | 120 | (8 | ) | (11 | ) | 10 | – | – | 31 | (11 | ) | (11 | ) | 66 | (7 | ) | (12 | ) | ||||||||||||||||||
| Zeffix | 130 | 129 | 7 | 1 | 11 | 18 | 10 | 22 | 27 | 29 | 97 | 3 | (5 | ) | 168 | 162 | 8 | 4 | 13 | 8 | – | 24 | 4 | 4 | 131 | 9 | 4 | |||||||||||||||||||||||||||||
| Relenza | 262 | 91 | >100 | >100 | 131 | – | – | 76 | 21 | 23 | 55 | >100 | 90 | |||||||||||||||||||||||||||||||||||||||||||
| Metabolic | 8 | 1,514 | 1,875 | (15 | ) | (19 | ) | 895 | (24 | ) | (30 | ) | 294 | 15 | 17 | 325 | (2 | ) | (6 | ) | ||||||||||||||||||||||||||||||||||||
| Avandia | 877 | 1,399 | (34 | ) | (37 | ) | 592 | (40 | ) | (45 | ) | 113 | (10 | ) | (10 | ) | 172 | (14 | ) | (17 | ) | |||||||||||||||||||||||||||||||||||
| Avandamet | 292 | 204 | 49 | 43 | 147 | 85 | 71 | 111 | 20 | 21 | 34 | 35 | 31 | |||||||||||||||||||||||||||||||||||||||||||
| Avandaryl | 50 | 42 | 26 | 19 | 41 | 10 | 3 | 3 | – | – | 6 | >100 | >100 | |||||||||||||||||||||||||||||||||||||||||||
| Bonviva/Boniva | 161 | 95 | 79 | 69 | 115 | 49 | 39 | 45 | >100 | >100 | 1 | – | – | |||||||||||||||||||||||||||||||||||||||||||
| Vaccines | 10 | 1,993 | 1,692 | 20 | 18 | 628 | 44 | 35 | 814 | 14 | 15 | 551 | 8 | 6 | ||||||||||||||||||||||||||||||||||||||||||
| Hepatitis | 529 | 479 | 14 | 10 | 199 | 33 | 24 | 235 | 3 | 4 | 95 | 8 | 4 | |||||||||||||||||||||||||||||||||||||||||||
| Influenza | 320 | 170 | 93 | 88 | 193 | >100 | >100 | 93 | >100 | >100 | 34 | (19 | ) | (21 | ) | |||||||||||||||||||||||||||||||||||||||||
| Infanrix, Pediarix | 543 | 511 | 9 | 6 | 196 | 23 | 14 | 275 | (3 | ) | (2 | ) | 72 | 26 | 24 | |||||||||||||||||||||||||||||||||||||||||
| Boostrix | 66 | 60 | 15 | 10 | 40 | 5 | (2 | ) | 19 | 27 | 27 | 7 | 75 | 75 | ||||||||||||||||||||||||||||||||||||||||||
| Rotarix | 91 | 44 | >100 | >100 | – | – | – | 23 | >100 | >100 | 68 | 79 | 74 | |||||||||||||||||||||||||||||||||||||||||||
| Cervarix | 10 | – | – | – | – | – | – | 9 | – | – | 1 | – | – | |||||||||||||||||||||||||||||||||||||||||||
| Cardiovascular and urogenital | 8 | 1,554 | 1,636 | – | (5 | ) | 970 | (2 | ) | (10 | ) | 412 | 3 | 4 | 172 | 7 | 2 | |||||||||||||||||||||||||||||||||||||||
| Coreg | 587 | 779 | (18 | ) | (25 | ) | 581 | (19 | ) | (25 | ) | – | – | – | 6 | 17 | – | |||||||||||||||||||||||||||||||||||||||
| Levitra | 49 | 43 | 23 | 14 | 47 | 24 | 15 | 2 | 100 | 100 | – | – | – | |||||||||||||||||||||||||||||||||||||||||||
| Avodart | 285 | 216 | 38 | 32 | 175 | 44 | 34 | 86 | 23 | 25 | 24 | 56 | 50 | |||||||||||||||||||||||||||||||||||||||||||
| Arixtra | 100 | 58 | 81 | 72 | 55 | 88 | 72 | 39 | 70 | 70 | 6 | 100 | 100 | |||||||||||||||||||||||||||||||||||||||||||
| Fraxiparine | 184 | 209 | (12 | ) | (12 | ) | – | – | – | 160 | (12 | ) | (11 | ) | 24 | (17 | ) | (20 | ) | |||||||||||||||||||||||||||||||||||||
| Vesicare | 50 | 32 | 69 | 56 | 50 | 69 | 56 | – | – | – | – | – | – | |||||||||||||||||||||||||||||||||||||||||||
| Anti-bacterials | 9 |  | 1,561 | 1,815 | (9 | ) | (14 | ) | 356 | (24 | ) | (32 | ) | 701 | (6 | ) | (7 | ) | 504 | 1 | (6 | ) | 7 | 1,330 | 1,369 | (1 | ) | (3 | ) | 195 | (3 | ) | (10 | ) | 612 | (3 | ) | (3 | ) | 523 | 3 | – | ||||||||||||||
| Augmentin | 708 | 825 | (9 | ) | (14 | ) | 223 | (21 | ) | (29 | ) | 298 | (9 | ) | (10 | ) | 187 | 9 | 3 | 530 | 570 | (6 | ) | (7 | ) | 67 | (23 | ) | (29 | ) | 250 | (7 | ) | (7 | ) | 213 | 5 | 2 | ||||||||||||||||||
| Augmentin IR | 533 | 584 | (5 | ) | (9 | ) | 59 | (15 | ) | (20 | ) | 293 | (10 | ) | (11 | ) | 181 | 8 | 1 | |||||||||||||||||||||||||||||||||||||
| Augmentin ES | 74 | 135 | (39 | ) | (45 | ) | 69 | (42 | ) | (48 | ) | – | – | – | 5 | >100 | >100 | |||||||||||||||||||||||||||||||||||||||
| Augmentin XR | 101 | 106 | 6 | (5 | ) | 95 | 1 | (10 | ) | 5 | >100 | >100 | 1 | >100 | – | |||||||||||||||||||||||||||||||||||||||||
| Zinnat/Ceftin | 218 | 246 | (7 | ) | (11 | ) | 9 | (52 | ) | (59 | ) | 133 | – | (1 | ) | 76 | (8 | ) | (16 | ) | ||||||||||||||||||||||||||||||||||||
| Metabolic | 8 |  | 1,253 | 1,079 | 27 | 16 | 852 | 26 | 13 | 135 | 19 | 16 | 266 | 35 | 28 | |||||||||||||||||||||||||||||||||||||||||
| Avandia/Avandamet | 1,116 | 931 | 32 | 20 | 852 | 26 | 13 | 103 | 49 | 47 | 161 | 62 | 52 | |||||||||||||||||||||||||||||||||||||||||||
| Vaccines | 7 |  | 1,196 | 1,123 | 11 | 7 | 268 | 6 | (5 | ) | 523 | 7 | 6 | 405 | 21 | 17 | ||||||||||||||||||||||||||||||||||||||||
| Hepatitis | 406 | 417 | 3 | (3 | ) | 134 | (5 | ) | (15 | ) | 201 | 7 | 5 | 71 | 9 | 4 | ||||||||||||||||||||||||||||||||||||||||
| Infanrix, Pediarix | 357 | 336 | 12 | 6 | 129 | 16 | 4 | 162 | 11 | 10 | 66 | 8 | 2 | |||||||||||||||||||||||||||||||||||||||||||
| Oncology and emesis | 5 |  | 934 | 1,001 | 2 | (7 | ) | 679 | 2 | (9 | ) | 170 | 6 | 4 | 85 | (5 | ) | (11 | ) | 2 | 477 | 1,069 | (54 | ) | (55 | ) | 272 | (65 | ) | (67 | ) | 139 | (10 | ) | (9 | ) | 66 | (14 | ) | (18 | ) | |||||||||||||||
| Zofran | 763 | 774 | 8 | (1 | ) | 565 | 10 | (2 | ) | 130 | 5 | 3 | 68 | (2 | ) | (7 | ) | 196 | 847 | (77 | ) | (77 | ) | 78 | (88 | ) | (89 | ) | 71 | (34 | ) | (34 | ) | 47 | (21 | ) | (23 | ) | ||||||||||||||||||
| Hycamtin | 99 | 110 | (3 | ) | (10 | ) | 64 | (7 | ) | (17 | ) | 29 | 13 | 16 | 6 | (19 | ) | (25 | ) | 119 | 113 | 10 | 5 | 70 | 6 | (3 | ) | 42 | 21 | 24 | 7 | – | – | |||||||||||||||||||||||
| Cardiovascular and | 5 |  | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| urogenital | 933 | 771 | 31 | 21 | 563 | 27 | 14 | 262 | 51 | 49 | 108 | 15 | 8 | |||||||||||||||||||||||||||||||||||||||||||
| Coreg | 432 | 361 | 34 | 20 | 425 | 37 | 23 | – | – | – | 7 | (43 | ) | (53 | ) | |||||||||||||||||||||||||||||||||||||||||
| Levitra | 49 | 37 | 41 | 32 | 20 | – | (9 | ) | 21 | 87 | 91 | 8 | >100 | 100 | ||||||||||||||||||||||||||||||||||||||||||
| Avodart | 64 | 19 | >100 | >100 | 34 | >100 | >100 | 27 | >100 | >100 | 3 | >100 | – | |||||||||||||||||||||||||||||||||||||||||||
| Tykerb | 51 | – | – | – | 36 | – | – | 13 | – | – | 2 | – | – | |||||||||||||||||||||||||||||||||||||||||||
| Other | 6 |  | 1,031 | 1,171 | (7 | ) | (12 | ) | 88 | (1 | ) | (11 | ) | 326 | (5 | ) | (8 | ) | 617 | (8 | ) | (14 | ) | 6 | 957 | 973 | 1 | (2 | ) | 65 | (18 | ) | (22 | ) | 266 | – | 1 | 626 | 4 | – | ||||||||||||||||
| Zantac | 273 | 328 | (12 | ) | (17 | ) | 70 | 1 | (9 | ) | 72 | (22 | ) | (23 | ) | 131 | (13 | ) | (17 | ) | 168 | 232 | (24 | ) | (28 | ) | 33 | (51 | ) | (54 | ) | 42 | (19 | ) | (19 | ) | 93 | (8 | ) | (14 | ) | |||||||||||||||
| 100 |  | 17,146 | 18,181 | 1 | (6 | ) | 8,425 | – | (10 | ) | 5,128 | 2 | – | 3,593 | 3 | (2 | ) | 100 | 19,233 | 20,078 | – | (4 | ) | 9,273 | (3 | ) | (10 | ) | 5,692 | 2 | 3 | 4,268 | 6 | 2 | ||||||||||||||||||||||
CER% represents turnover growth at constant exchange rates. £% represents growth at actual exchange rates. An analysis of turnoverTurnover by quarter is given in the Financial record (pages 154on pages 162 to 159).165.
| GSK Annual Report 2007 | 37 |
| Financial review | |
| Business review | |
| Financial review 2007 | |
| continued | |
2004 YearcontinuedInfanrix/Pediarix grew 9% to £543 million, again driven by US growth of 23%. Sales of the new two-dose vaccine,Rotarix, to prevent rotavirus gastroenteritis, doubled to £91 million, with strong growth in both Europe and International. Sales ofCervarix, GSK’s vaccine to prevent cervical cancer, were £10 million. It has been approved in over 50 countries and licensing applications have been submitted in 28 countries including Japan. GSK’s pre-pandemic influenza vaccine achieved sales of £146 million. Discussions regarding further orders continue with a number of governments.
Cardiovascular and urogenital
Sales ofCoreg, for heart disease, fell 18% to £587 million, following the introduction of US generic competition toCoreg IR in September. Sales ofCoreg CR, which was launched in March 2007, were £88 million.Avodart, for benign prostatic hyperplasia (enlarged prostate), continued to perform strongly with sales up 38% to £285 million. Positive data from the CombAT study, (assessing use ofAvodart and the alpha-blocker, tamsulosin, as combination therapy), were recently published in the Journal of Urology. GSK has filed for a co-prescription indication in the USA, Europe and some International markets. A response is expected from the FDA during the second quarter of 2008.
Anti-bacterials
Anti-bacterial sales declined 1% to £1,330 million reflecting generic competition in all regions.
Oncology and emesis
Tykerb achieved sales of £51 million in its first year, £36 million of which arose in the USA following its launch in March. Sales ofZofran declined 77% to £196 million, reflecting generic competition in the USA, Europe and International where sales declined 88%, 34% and 21% respectively.
Other therapeutic areas
Sales ofZantac fell 24% to £168 million, with declines in all regions.
Regional analysis
Pharmaceutical turnover by geographic region in 2007 on an invoiced basis
The turnover reported in the table below represents sales invoiced by GlaxoSmithKline’sGSK’s local entity to its customers in the local market plus co-promotion income within each market.
Pharmaceutical turnover by geographic region in 2004 on an invoiced basis
| Growth* | ||||||||||||||||||||
| Region/ | % of |  | 2004 | 2003 | % of | 2007 | 2006 | Growth* | ||||||||||||
| major markets | total | £m | £m | CER% | £% | total | £m | £m | CER% | £% | ||||||||||
| USA | 49 |  | 8,425 | 9,410 | – | (10 | ) | 48 | 9,273 | 10,353 | (3 | ) | (10 | ) | ||||||
| Europe | 30 |  | 5,128 | 5,114 | 2 | – | 30 | 5,692 | 5,547 | 2 | 3 | |||||||||
| France | 982 | 1,005 | (1 | ) | (2 | ) | 991 | 967 | 2 | 2 | ||||||||||
| UK | 735 | 731 | 1 | 1 | 822 | 786 | 5 | 5 | ||||||||||||
| Italy | 611 | 660 | (6 | ) | (7 | ) | 620 | 664 | (7 | ) | (7 | ) | ||||||||
| Germany | 521 | 538 | (2 | ) | (3 | ) | 602 | 592 | 1 | 2 | ||||||||||
| Spain | 560 | 528 | 7 | 6 | 605 | 577 | 4 | 5 | ||||||||||||
| Poland | 148 | 167 | (8 | ) | (11 | ) | ||||||||||||||
| Other Europe | 1,571 | 1,485 | 8 | 6 | 2,052 | 1,961 | 4 | 5 | ||||||||||||
| International | 21 |  | 3,593 | 3,657 | 3 | (2 | ) | 22 | 4,268 | 4,178 | 6 | 2 | ||||||||
| Asia Pacific | 1,162 | 1,140 | 8 | 2 | 1,441 | 1,377 | 6 | 5 | ||||||||||||
| Japan | 770 | 753 | 5 | 2 | 867 | 860 | 10 | 1 | ||||||||||||
| Middle East, Africa | 669 | 693 | (1 | ) | (3 | ) | 774 | 744 | 7 | 4 | ||||||||||
| Latin America | 581 | 597 | 8 | (3 | ) | 709 | 714 | 4 | (1 | ) | ||||||||||
| Canada | 411 | 474 | (11 | ) | (13 | ) | 477 | 483 | 2 | (1 | ) | |||||||||
| 100 | 17,146 | 18,181 | 1 | (6 | ) | 100 | 19,233 | 20,078 | 0 | (4 | ) | |||||||||
| * | CER% represents |
| Sales and constant exchange rate growth by region |
 |
Individual governments determine the pricing of medicines in most countries within Europe, which can result in wide price variations for the same product. Parallel trade occurs when third parties exploit this price differential by purchasing products in the marketmarkets where low prices are enforced and selling them to governments and other purchasers in those markets where higher prices have been agreed. This parallel trade is permitted under the single market rules in the European Union. GlaxoSmithKlineGSK does not derive any benefit from the profit on resale at the higher price.
As a result, management believes that within the European region, turnover by market, on an invoiced basis as presented above, does not properly represent the consumption of the products within each market. GlaxoSmithKlineGSK employees based in each market are instrumental in the promotion of the Group’s products within their market, thereby creating a product sale and final consumption in that market.
The following table gives the adjustments made in order to restate the turnover for markets within Europe on a turnover created basis.
Pharmaceutical turnover for Europe region in 2007 on a turnover created basis
| 2007 | 2006 | |||||||||
| Region/ | Invoiced | Adjustment | Created | Invoiced | Adjustment | Created | ||||
| major markets | £m | £m | £m | £m | £m | £m | ||||
| Europe | 5,692 | – | 5,692 | 5,547 | – | 5,547 | ||||
| France | 991 | (43 | ) | 948 | 967 | (66 | ) | 901 | ||
| UK | 822 | 101 | 923 | 786 | 102 | 888 | ||||
| Italy | 620 | (14 | ) | 606 | 664 | (25 | ) | 639 | ||
| Germany | 602 | 87 | 689 | 592 | 72 | 664 | ||||
| Spain | 605 | (12 | ) | 593 | 577 | (14 | ) | 563 | ||
| Other Europe | 2,052 | (119 | ) | 1,933 | 1,961 | (69 | ) | 1,892 | ||
These adjustments are GlaxoSmithKline’sGSK’s estimates based on the most recent data from independent external sources, valued in sterlingSterling at relevant exchange rates. Management believes that this turnover created basis of reporting turnover by market provides a better reflection of the performance of the businesses in each market within Europe.
The total turnover for the Europe region is unaffected by this restatement.
Parallel trade occurs occasionally elsewhere in the world, but it is not sufficiently material to affect significantly the turnover data by market presented on an invoiced basis.
| 38 | GSK Annual Report 2007 |
| REPORT OF THE DIRECTORS | |
| Financial review 2007 | |
| Business review | |
| Financial review 2007 | |
| continued | |
Pharmaceutical turnover for Europeby geographic region in 20042007 on a turnover created basis
Turnover by market within Europe has been adjusted for the effects of parallel trade to show turnover on the basis of the country where the product is finally consumed, not where the product was sold by GlaxoSmithKline.GSK.
| Region/ major markets | 2004 | 2003 | ||||||||||
| Invoiced £m | Adjustment £m | Created £m | Invoiced £m | Adjustment £m | Created £m | |||||||
| Europe | 5,128 | – | 5,128 | 5,114 | – | 5,114 | ||||||
| France | 982 | (32 | ) | 950 | 1,005 | (39 | ) | 966 | ||||
| UK | 735 | 95 | 830 | 731 | 60 | 791 | ||||||
| Italy | 611 | (23 | ) | 588 | 660 | (8 | ) | 652 | ||||
| Germany | 521 | 55 | 576 | 538 | 59 | 597 | ||||||
| Spain | 560 | (15 | ) | 545 | 528 | (21 | ) | 507 | ||||
| Poland | 148 | – | 148 | 167 | – | 167 | ||||||
| Other Europe | 1,571 | (80 | ) | 1,491 | 1,485 | (51 | ) | 1,434 | ||||
Pharmaceutical turnover by geographic region in 2004 on a turnover created basis
| Growth* | ||||||||||||||||||||
| Region/ | % of | | 2004 | 2003 | % of | 2007 | 2006 | Growth* | ||||||||||||
| major markets | total | £m | £m | CER% | £% | total | £m | £m | CER% | £% | ||||||||||
| USA | 49 | | 8,425 | 9,410 | – | (10 | ) | 48 | 9,273 | 10,353 | (3 | ) | (10 | ) | ||||||
| Europe | 30 | | 5,128 | 5,114 | 2 | – | 30 | 5,692 | 5,547 | 2 | 3 | |||||||||
| France | 950 | 966 | – | (2 | ) | 948 | 901 | 5 | 5 | |||||||||||
| UK | 830 | 791 | 5 | 5 | 923 | 888 | 4 | 4 | ||||||||||||
| Italy | 588 | 652 | (9 | ) | (10 | ) | 606 | 639 | (6 | ) | (5 | ) | ||||||||
| Germany | 576 | 597 | (2 | ) | (4 | ) | 689 | 664 | 3 | 4 | ||||||||||
| Spain | 545 | 507 | 9 | 7 | 593 | 563 | 5 | 5 | ||||||||||||
| Poland | 148 | 167 | (8 | ) | (11 | ) | ||||||||||||||
| Other Europe | 1,491 | 1,434 | 7 | 4 | 1,933 | 1,892 | 1 | 2 | ||||||||||||
| International | 21 | | 3,593 | 3,657 | 3 | (2 | ) | 22 | 4,268 | 4,178 | 6 | 2 | ||||||||
| Asia Pacific | 1,162 | 1,140 | 8 | 2 | 1,441 | 1,377 | 6 | 5 | ||||||||||||
| Japan | 770 | 753 | 5 | 2 | 867 | 860 | 10 | 1 | ||||||||||||
| Middle East, Africa | 669 | 693 | (1 | ) | (3 | ) | 774 | 744 | 7 | 4 | ||||||||||
| Latin America | 581 | 597 | 8 | (3 | ) | 709 | 714 | 4 | (1 | ) | ||||||||||
| Canada | 411 | 474 | (11 | ) | (13 | ) | 477 | 483 | 2 | (1 | ) | |||||||||
| 100 | 17,146 | 18,181 | 1 | (6 | ) | 100 | 19,233 | 20,078 | – | (4 | ) | |||||||||
| * | CER% represents |
USAThe USA reported flat turnoverSales in the year despite the significant impact ofUSA declined 3% to £9.3 billion, reflecting generic competition toPaxil and Wellbutrin. Excluding,Zofran, Flonase andCoreg IR which declined 38%, 88%, 60% and 31% respectively and a decline in the sales of theseAvandia products, turnover grew 10 per cent. The US business represented 49 per cent of total pharmaceutical turnoverpartly offset by growth in 2004.
Advair maintained its strong growth with sales of £1,330 million, up 20 per cent. However, this adversely affected sales of its constituent products, Flovent and Serevent, which both showed declines. FlonaseAdvair, indicated for the treatment of perennial rhinitis, grew by nine per cent.anti-virals, vaccines,Lamictal andRequip.
Sales of theWellbutrin Avandiaproducts fell 12 per cent to £735 million. Wellbutrin IR and SR sales fell 65 per cent to £270 million as product group declined 29% following the publication of an article in the New England Journal of Medicine in May, which suggested there may be a result of generic competition. The impact was partially offset, however, bycardiovascular risk associated withAvandia. Following clarification from the exceptionally strong performance of Wellbutrin XL, theFDA in October, there is now a new once-daily product, which achieved sales of £465 million in its first full year on the market.approved label forAvandia.
TotalAdvair sales grew 9% to £1,891 million owing to the increased use in the treatment of the Paxil franchise were down 51 per cent to £519 million as a result of generic competition to Paxil IR (sales of which declined 82 per cent to £131 million). Mitigating this decline was the performance of Paxil CR which generated sales of £388 million, up 13 per cent.COPD.
Sales in the anti-virals therapeutic area grew 12 per cent19% to £1,494 million with herpes products up 20% and HIV products down 2%. Within HIV, competition to older products,Combivir down 11% andEpivir down 16%, was partly offset by the growth of new productsEpzicom/Kivexaup four per cent. 23% andLexiva up 14%.Valtrex, for herpes, grew 30 per cent20% to £668 million, driven by patients switching to suppression therapy.
Sales ofAvandia/Avandamet Relenzaincreased, an anti-viral treatment for flu, were £131 million, primarily driven by 26 per cent. Antibacterial sales declined 24 per cent asone-off government orders for stockpiling against a result of generic competition that began in the third quarter of 2002. Coreg sales increased 37 per cent as it continued to benefit from its wide range of indications.possible flu pandemic.
Vaccines grew six per cent44% to £628 million reflecting the good performance of the Hepatitis family of products,Pediarix,Fluarix/Flulaval and the launch ofBoostrix.
Sales ofLamictal, for the treatment of epilepsy and bipolar disorder, grew 26% to £892 million, benefiting from its new indication to treat one of the most serious forms of epilepsy – primary generalised tonic-clonic seizures.
Sales ofRequip, for Parkinson’s disease and Restless Legs Syndrome (RLS), grew 46% to £238 million following launch of the RLS indication in 2006.
Europe
The discussion of individual market performance in the Europe region is on a turnover created basis rather than a turnover invoiced basis.
Sales in Europe region contributed 30 per cent30% of pharmaceutical turnover. Although overall turnover growth inand grew 2% to £5.7 billion, with strong sales ofSeretide and vaccines offsetting the region was only two per cent, good growth was recorded in Spainimpact of generic competition to a number of products and Southern and Eastern Europe. Governmentcontinued price cuts resulting from government healthcare reforms, including pricing and reimbursement restrictions, adversely affected turnover in France, Italy and Germany.reforms.
All major markets recorded growth with the exception of Italy, which was adversely impacted by pricing restrictions and generic competition. Major growth drivers wereSeretide, GlaxoSmithKline’sGSK’s largest selling product in Europe, grew 18 per cent and reported notablewith growth in Spainof 9%, and the UK. Seretide and its constituent products Serevent and Flixotide grew eight per cent.
The decline in sales of the herpesvaccines franchise, was mainly as a result of generic competition for Zovirax partially offset by patients switching to the newer product, Valtrexup 14%.
Seroxat Generic competition adversely impacted sales wereofSeroxat, down 31 per cent reflecting generic competition in the UK19%,Lamictal, down 18%,Zofran, down 34% and France.
Anti-bacterial sales declined six per centImigran, down 25%. Sales of anti-bacterials decreased 3% due to a combination of a weaker ‘flu season than in 2006 and generic competition throughout the regioncompetition.
VaccinesSales ofAvandia/Avandamet grew by seven per cent driven by the hepatitis franchise and Infanrix4%.
International
The International region reported year on year turnover growth of three per cent. Strong6%. Faster growing markets included Japan, up 10%, China, up 24% and Middle East/Africa, up 7%, while there was more modest sales growth of 2% in Asia Pacific up eight per cent and Latin America up eight per cent, was offset by flat salesCanada, 3% in Australia and declines4% in Latin America. The Canadian sales performance reflected lower sales of five per centAvandia and generic competition forZofran whilst the Australian business was adversely impacted by government pricing and lower government orders forRelenza.
The good performance in Sub-Sahahra Africa, eight per centJapan was driven by the launch in the Middle East/North Africayear ofAdoair and 11 per cent in Canada. In Canada, the sales decline was due to generic erosion of strong demand forPaxil IRRelenza., excluding this element, Canada grew 4.5 per cent.
Japan recorded turnover growth of five per cent, despite routine government price reductions being implemented in 2004. Paxil up 25 per cent, Serevent up 74 per cent and Valtrex up 16 per cent performed particularly well offsetting smallThese were partially offset by declines in the older productsZantacandZovirax.
Across allthe remaining markets in International, the key products driving growth wereSeretide, which grew 15 per cent23% to record sales of £229£372 million,Avandia/AvandametValtrex, which grew 62 per cent13% to £161£146 million, and the vaccines franchise, which recorded growth of 21 per cent8% and achieved sales of £405£551 million, and the HIV products which grew 5% to £193 million.
| Consumer Healthcare sales | ||||||||
| Growth | ||||||||
| 2004 | 2003 | |||||||
| £m | £m | CER% | £% | |||||
| OTC medicines | 1,489 | 1,556 | 2 | (4 | ) | |||
| Analgesics | 349 | 342 | 7 | 2 | ||||
| Dermatological | 193 | 237 | (14 | ) | (19 | ) | ||
| Gastro-intestinal | 256 | 283 | (1 | ) | (10 | ) | ||
| Respiratory tract | 152 | 151 | 4 | 1 | ||||
| Smoking control | 341 | 325 | 14 | 5 | ||||
| Natural wellness support | 156 | 166 | (1 | ) | (6 | ) | ||
| Oral care | 1,088 | 1,082 | 4 | 1 | ||||
| Nutritional healthcare | 636 | 622 | 5 | 2 | ||||
| 3,213 | 3,260 | 3 | (1 | ) | ||||
TheAvandia range of products declined 7% to £212 million, with declines in Canada and Korea, partly offset by growth in Australia.
Consumer Healthcare sales
An analysis of Consumer Healthcare sales of three per cent to £3.2 billion comprised an OTC medicines sales increase of two per cent, a Nutritional healthcare sales increase of five per cent and Oral care sales increase of four per cent.
OTC medicinesOTC medicine sales were £1.5 billion, up two per cent. Sales growth from smoking control productsis set out in the USA, up 12 per cent, and Europe, up 24 per cent, helped to offset the decline in dermatological products, which were down 14 per cent due to generic competition to Cutivate in the USA. Expansion of the Panadol brand in International markets helped analgesics grow seven per cent.following table:
In July, GlaxoSmithKline obtained the OTC marketing rights in the USA for orlistat, an FDA-approved prescription product for obesity management marketed by Roche as Xenical.
Oral careOral care sales were £1.1 billion, up four per cent. Strong growth in International of nine per cent was led by the Sensodyne, Polident and Poligrip brands.
Nutritional healthcareSales of Nutritional healthcare products grew five per cent to £0.6 billion. Lucozade grew seven per cent to £268 million.
| 2007 | 2006 | Growth | |||||
| £m | £m | CER% | £% | ||||
| OTC medicines | 1,718 | 1,496 | 20 | 15 | |||
| Analgesics | 410 | 380 | 11 | 8 | |||
| Dermatological | 175 | 165 | 10 | 6 | |||
| Gastro-intestinal | 262 | 252 | 9 | 4 | |||
| Respiratory tract | 244 | 172 | 45 | 42 | |||
| Smoking control | 314 | 353 | (6 | ) | (11 | ) | |
| Natural wellness support | 125 | 132 | (3 | ) | (5 | ) | |
| Weight management | 150 | – | – | – | |||
| Oral care | 1,049 | 993 | 8 | 6 | |||
| Nutritional healthcare | 716 | 658 | 9 | 9 | |||
| 3,483 | 3,147 | 14 | 11 | ||||
| GSK Annual Report 2007 | 39 |
| Business review | |
| Financial review 2007 | |
| continued | |
2004 YearOTC medicinescontinuedOver-the-counter medicine sales grew 20% to £1.7 billion, withPanadol up 14% to £262 million andalli sales of £150 million since launch in the USA in June. Smoking control products declined 6% to £314 million due to strong competition in the US market.Breathe Right andFiberChoice, added to the portfolio with the acquisition of CNS in December 2006, achieved combined sales of £81 million.
TradingOral care
Oral care sales grew 8% to over £1 billion. Sales ofAquafresh were up 12% to £308 million, helped by the success of the newAquafresh White Trays.Sensodyne also grew strongly, up 16% for the year to £293 million, driven by a successful launch ofSensodyne ProNamel.
Nutritional healthcare
Nutritional healthcare product sales grew 9% to £716 million.Lucozade grew 16% to £347 million, andHorlicks grew 12% to £174 million.Ribena sales were down 7% to £156 million.
Operating profit – statutorytotal resultsFor 2004
Total results include restructuring costs related to the Group is reporting results on a statutory basis only. The analysis below of trading profit and subsequent discussion compares the 2004 results with 2003 statutory results.
| 2003 | ||||||||||||
| 2004 | (restated) | Growth | ||||||||||
| £m | % | £m | % | CER% | £% | |||||||
| Turnover | 20,359 | 100.0 | 21,441 | 100.0 | 1 | (5 | ) | |||||
| Cost of sales | (4,309 | ) | (21.2 | ) | (4,544 | ) | (21.2 | ) | (1 | ) | (5 | ) |
| Selling, general | ||||||||||||
| and administration | (7,061 | ) | (34.7 | ) | (7,597 | ) | (35.4 | ) | (2 | ) | (7 | ) |
| Research and | ||||||||||||
| development | (2,839 | ) | (13.9 | ) | (2,791 | ) | (13.0 | ) | 7 | 2 | ||
| Trading profit | 6,150 | 30.2 | 6,509 | 30.4 | 5 | (6 | ) | |||||
In 2004, the Group adopted UITF Abstract 38 and the revised Abstract 17 relating to shares held by the ESOP Trusts and share options and awards. Comparative information for 2003 has been restated accordingly. Trading profit and profit before taxnew Operational Excellence programme, which commenced in 2003 have been reduced by £16 million and net assets at 31st December 2003 by £2,661 million.October 2007.
| 2007 | 2006 | Growth | ||||||||||
| £m | % | £m | % | CER% | £% | |||||||
| Turnover | 22,716 | 100.0 | 23,225 | 100.0 | 2 | (2 | ) | |||||
| Cost of sales | (5,317 | ) | (23.4 | ) | (5,010 | ) | (21.6 | ) | 8 | 6 | ||
Selling, general and administration | (6,954 | ) | (30.6 | ) | (7,257 | ) | (31.2 | ) | – | (4 | ) | |
Research and development | (3,327 | ) | (14.7 | ) | (3,457 | ) | (14.9 | ) | (1 | ) | (4 | ) |
| Other operating income | 475 | 2.1 | 307 | 1.3 | ||||||||
| Operating profit | 7,593 | 33.4 | 7,808 | 33.6 | 3 | (3 | ) | |||||
Cost of sales
Cost of sales as a percentage of turnover remained in lineincreased by 1.8 percentage points. At constant exchange rates, cost of sales as a percentage of turnover increased by 1.3 percentage points, reflecting charges related to the new Operational Excellence programme of £111 million (2006 – £nil) and unfavourable product and regional mixes compared with the prior year as reduced merger and manufacturing restructuring costs were offset by a significant weakening of the US dollar relative to last year, the loss of higher margin Paxil IR and Wellbutrin SR sales to generics, and an adverse product mix. Merger and manufacturing restructuring costs were nil in 2004 but £356 million in 2003.2006.
Selling, general and administration
Selling, general and administration (SG&A) costs declined two per cent (seven per cent in sterling terms) reflecting savings in general and administration that were partly offset by increased advertising, promotion and selling costs. These latter costs increased three per cent, and accounted for a one percentage point increase in total SG&A. General and administration costs declined eight per cent and accounted for a three percentage point reduction in total SG&A. This was due to lower charges related to programmes to deliver future cost savings (equal to a two percentage point reduction in total SG&A) and other general expense reductions (equal to a three percentage point decline in total SG&A). These reductions were partly offset by higher provisions for legal matters, equivalent to a two percentage point increase in total SG&A. Net of currency movements, there was an overall reduction of 0.7 percentage points relative to 2003 for expenses expressed as a percentage of turnover.
The higher provisions for legal matters includeturnover reduced 0.6 percentage points. At constant exchange rates, the decrease was 0.7 percentage points, reflecting flat expenditure compared with the prior year on a chargeturnover growth of £141 million in Quarter 4 20042%. SG&A costs included charges related to the introductionnew Operational Excellence programme of an IBNR (incurred but not reported) actuarial technique to determine a reasonable estimate of the Group’s exposure for unasserted claims in relation to a number of product liability matters.£137 million (2006 – £nil). Advertising and promotion increased by 2%, selling and distribution increased by 2%, and general and administration expenditure declined 5%.
Research and development
R&D expenditure increased seven per cent reflecting increased clinical trial activity. Pharmaceuticalsdeclined 1% and included charges related to the new Operational Excellence programme of £90 million (2006 – £nil). The benefit arose from lower impairment charges and the winding-down of previous restructuring activities. Excluding these items, R&D expenditure declined 2% on last year. Pharmaceutical R&D expenditure represented 15.9 per cent16.7% (2006 – 16.7%) of pharmaceutical turnoverturnover.
Other operating income
Other operating income includes royalty income, equity investment disposals and impairments, product disposals and fair value adjustments to financial instruments. Other operating income was £475 million in 2007 (2006 – £307 million). The increase is primarily due to higher royalty income (£216 million in 2007 compared with £94 million in 2006), favourable fair value movements on financial instruments (£41 million in 2007 compared with £29 million in 2006), and the year.Roche litigation settlement relating to carvedilol, partially offset by lower asset disposal profits.
TradingOperating profit
Overall, the trading margin declined 0.2 percentage points as tradingoperating profit of £6,150 million declined six per cent in sterling terms. At constant exchange rates trading profit increased five per cent and the margin decreased 0.2 percentage points as operating profit decreased 3% in sterling terms to £7,593 million. Operating profit increased 3% at constant exchange rates and the CER margin increased 0.5 percentage points, reflecting the completion of the mergerflat SG&A expenditure and manufacturing restructuring programme in 2003, lower charges relating to programmes to deliver future cost savingshigher other operating income, partially offset by higheran increase in cost of sales.
In the year, gains from asset disposals were £109 million (£169 million in 2006), costs for legal provisionsmatters were £255 million (£333 million in 2006), fair value movements on financial instruments resulted in an income of £41 million (income of £29 million in 2006), charges related to old restructuring activity were £92 million (£205 million in 2006) and increased R&D expenditure.charges related to the new Operational Excellence programme were £338 million (2006 – £nil). The total operating profit impact of these items was a £535 million charge in 2007 (£340 million charge in 2006).
Profit before taxation – statutorytotal results
The analysis and discussion belowNet finance costs
| 2007 | 2006 | |||
| Finance income | £m | £m | ||
| Interest and other finance income | 255 | 285 | ||
| Fair value adjustments and hedges | 7 | 2 | ||
| 262 | 287 | |||
| Finance costs | ||||
| Interest costs | (432 | ) | (314 | ) |
| Unwinding of discount on liabilities | (27 | ) | (36 | ) |
| Fair value adjustments and hedges | 6 | (2 | ) | |
| (453 | ) | (352 | ) | |
Finance costs increased owing to increased levels of profit before taxation relatesdebt to statutory performance.finance the share buy-back programme.
| 2004 | 2003 | |||
| Other operating income/(expense) | £m | £m | ||
| Royalties and other income | 96 | 75 | ||
| Other operating expense | (296 | ) | (436 | ) |
| (200 | ) | (361 | ) | |
| Income from equity investments and | ||||
| other disposals | 140 | 228 | ||
| (60 | ) | (133 | ) | |
Other operating expense includes litigation costs and provisions relating
| 40 | GSK Annual Report 2007 |
| REPORT OF THE DIRECTORS | |
| Financial review 2007 | |
| Business review | |
| Financial review 2007 | |
| continued | |
Other operating expense was £60 million in the year compared with £133 million in 2003. The charge in 2004 reflects provisions related to litigation matters and other legal matters, partly offest by minor product divestments, sales of equity investments and other income. The net charge from legal provisions and gain on sales of equity investments was lower in 2004 compared with last year.
Share of profits/(losses)after tax profits of associates and joint ventures and associated undertakings
The share of profits of associates arises principally from the Group’s holding in Quest Diagnostics Inc.
Disposal of interest in associatesDuring 2004, the Group disposed of 3.8 million shares from its investment in Quest Diagnostics Inc. for cash proceeds of £188 million, reducing the Group’s shareholding at 31st December 2004 to 18.6 per cent. After recognising a charge of £17 million for goodwill previously written off to reserves a profit of £139 million was recognised.
| 2004 | 2003 | |||
| Net interest payable | £m | £m | ||
| Interest payable | (298 | ) | (214 | ) |
| Investment income | 102 | 61 | ||
| (196 | ) | (153 | ) | |
| Share of interest payable of associate | (7 | ) | (8 | ) |
| (203 | ) | (161 | ) | |
Net interest payable increased compared with 2003 largely as a result of higher average effective Group interest rate and higher borrowings.
Profit on ordinary activities before taxation – statutorytotal results
Taking account of net other operating income/(expenses),finance costs and the contribution from associates, business disposals and net interest payable, statutorytotal profit before taxtaxation was £6,119£7,452 million compared with £6,313£7,799 million in 2003,2006, an increase of eight per cent (three per cent decline in sterling).2% at constant exchange rates, but a 4% sterling decline.
Trading profit – business performanceOperational Excellence
DuringIn October 2007, GSK announced a significant new £1.5 billion Operational Excellence programme to improve the effectiveness and productivity of its operations.
This new programme is expected to deliver annual pre-tax savings of £700 million by 2010. GSK expects to realise the majority of annual savings within the first two years 2000of the programme, with approximately £350 million expected by 2008 and £550 million by 2009. These savings will partly mitigate the expected impact to 2003, business performance was2008 earnings from generic competition and lowerAvandia sales and the primary performance measure used by management and was presented after excluding merger items, integration andassociated adverse impact on GSK’s gross margin. One-off charges of £338 million before tax relating to the programme were recorded in Q4 2007. There were no significant acquisition-related restructuring costs incurred in 2006 or 2007.
Because of the significance of this new programme, a columnar presentation has been adopted in the income statement in order to illustrate GSK’s underlying performance in 2007. The analysis below of operating profit and disposal of businesses, as managementthe subsequent discussion excludes restructuring costs related to the new Operational Excellence programme, which commenced in October 2007. Management believes that exclusion of these items provides a better comparisonmore useful reflection of the way in which the business performance for the periods presented. For 2004, with the completion of these programmes, the Group is reporting results on a statutory basis only. The analysis below of trading profitmanaged, and subsequent discussion compares the 2004 results with 2003 business performance results. Accordinglyaccordingly this supplemental information is provided as a supplementin addition to that contained in the consolidated income statement of profit and loss on pagespage 90 and 91 prepared in accordance with UK GAAP.IFRS.
| 2003 | ||||||||||||
| 2004 | restated | Growth | ||||||||||
| £m | % | £m | % | CER% | £% | |||||||
| Turnover | 20,359 | 100.0 | 21,441 | 100.0 | 1 | (5 | ) | |||||
| Cost of sales | (4,309 | ) | (21.2 | ) | (4,188 | ) | (19.5 | ) | 7 | 3 | ||
| Selling, general | ||||||||||||
| and administration | (7,061 | ) | (34.7 | ) | (7,579 | ) | (35.4 | ) | (2 | ) | (7 | ) |
| Research and | ||||||||||||
| development | (2,839 | ) | (13.9 | ) | (2,770 | ) | (12.9 | ) | 8 | 2 | ||
| Trading profit | 6,150 | 30.2 | 6,904 | 32.2 | (1 | ) | (11 | ) | ||||
Operating profit – business performance
| 2007 | 2006 | Growth | ||||||||||
| £m | % | £m | % | CER% | £% | |||||||
| Turnover | 22,716 | 100.0 | 23,225 | 100.0 | 2 | (2 | ) | |||||
| Cost of sales | (5,206 | ) | (22.9 | ) | (5,010 | ) | (21.6 | ) | 6 | 4 | ||
| Selling, general and administration | (6,817 | ) | (30.0 | ) | (7,257 | ) | (31.2 | ) | (2 | ) | (6 | ) |
| Research and development | (3,237 | ) | (14.3 | ) | (3,457 | ) | (14.9 | ) | (3 | ) | (6 | ) |
| Other operating income | 475 | 2.1 | 307 | 1.3 | ||||||||
| Operating profit | 7,931 | 34.9 | 7,808 | 33.6 | 8 | 2 | ||||||
Cost of sales
Cost of sales increased as a percentage of turnover increased by 1.3 percentage points. At constant exchange rates, cost of sales as a resultpercentage of a significant weakening of the US dollar relative to 2003, the loss of higher margin Paxil IRturnover increased by 0.8 percentage points, reflecting unfavourable product and Wellbutrin SR sales to generics and an adverse productregional mix.
Selling, general and administrationSG&A costs declined two per cent (seven per cent in sterling terms) reflecting savings in
Selling, general and administration that(SG&A) costs as a percentage of turnover reduced 1.2 percentage points and at constant exchange rates, the decrease was 1.3 percentage points, reflecting a 2% decline in expenditure compared with prior year on a turnover growth of 2%. SG&A costs were down 2% due to lower selling and general and administration expenditure partly offset by higher advertising and promotion. Advertising and promotion increased advertising, promotion and selling costs. These latter costs increased three per cent,2% and accounted for less than a one percentage point1% increase in total SG&A. GeneralSelling and distribution declined 1% and general and administration costsexpenditure declined eight per cent and7%. Collectively these items accounted for a three percentage point reduction2% decline in total SG&A. This&A, of which one percentage point was due to lower charges related to programmeslegal matters.
Research and development
R&D expenditure decreased 3% partly as a result of lower impairment charges and the winding-down of previous restructuring activities. Excluding these items, R&D expenditure was flat. Pharmaceutical R&D expenditure represented 16.2% (2006 – 16.7%) of pharmaceutical turnover.
Other operating income
Other operating income includes royalty income, equity investment disposals and impairments, product disposals and fair value adjustments to deliver future cost savings (equalfinancial instruments. Other operating income was £475 million in 2007 (2006 – £307 million). The increase is primarily due to a two percentage point reductionhigher royalty income (£216 million in total SG&A)2007 compared with £94 million in 2006), favourable fair value movements on financial instruments (£41 million in 2007 compared with £29 million in 2006), and other general expense reductions (equalthe Roche litigation settlement relating to a three percentage point decline in total SG&A). These reductions were partlycarvedilol, partially offset by lower asset disposal profits.
Operating profit
Overall, the operating profit margin increased 1.3 percentage points as operating profit increased 2% in sterling terms to £7,931 million. Operating profit increased 8% at constant exchange rates and the margin increased 2 percentage points, reflecting declines in SG&A and R&D expenditure on turnover growth of 2%, and higher provisionsother operating income.
In the year, gains from asset disposals were £109 million (2006 – £169 million), costs for legal matters equivalent to a two percentage point increasewere £255 million (2006 – £333 million), fair value movements on financial instruments resulted in total SG&A. Netan income of currency movements, there was an overall reduction of 0.7 percentage points relative to 2003 for expenses expressed as a percentage of turnover.
The higher provisions for legal matters include a charge of £141£41 million in Quarter 4 2004 related to the introduction of an IBNR (incurred but not reported) actuarial technique to determine a reasonable estimate of the Group’s exposure for unasserted claims in relation to a number of product liability matters.
Research(2006 – £29 million) and developmentResearch and development (R&D) increased eight per cent reflecting increased clinical trial activity. Pharmaceuticals R&D expenditure represented 15.9 per cent of pharmaceutical turnover in the year.
Trading profitTrading profit was £6,150 million, a one per cent decrease (11 per cent decline in sterling terms) compared with 2003 business performance. The trading margin declined two percentage points compared with 2003. Net of currency movements the margin declined 0.7 percentage points, reflecting higher R&D expenditure, a higher cost of sales due to a less favourable product mix and higher provisions for legal matters, partially offset by cost savings initiatives in general and administration and lower charges related to programmes to deliver future cost savings.old restructuring activity were £92 million (2006 – £205 million).The operating profit impact of these items was a £197 million charge in 2007 (2006 – £340 million).
Profit before taxation – business performance
The analysis and discussion below of profit before taxation relatesNet finance costs
| 2007 | 2006 | |||
| Finance income | £m | £m | ||
| Interest and other income | 255 | 285 | ||
| Fair value adjustments and hedges | 7 | 2 | ||
| 262 | 287 | |||
| Finance costs | ||||
| Interest costs | (432 | ) | (314 | ) |
| Unwinding of discount on liabilities | (27 | ) | (36 | ) |
| Fair value adjustments and hedges | 6 | (2 | ) | |
| (453 | ) | (352 | ) | |
| GSK Annual Report 2007 | 41 |
Back to statutory performance in 2004 and business performance in 2003.Contents
| 2004 | 2003 | |||
| Other operating income/(expense) | £m | £m | ||
| Royalties and other income | 96 | 75 | ||
| Other operating expense | (296 | ) | (436 | ) |
| (200 | ) | (361 | ) | |
| Income from equity investments and | ||||
| other disposals | 140 | 228 | ||
| (60 | ) | (133 | ) | |
Other operating expense includes litigation costs and provisions relating to legal claims on withdrawn products, product withdrawals, anti-trust matters and claims with respect to sales, marketing and reimbursement. Income from equity investments and other disposals includes equity investment carrying value adjustments arising from stock market changes, product disposals and equity investment sales.
Other operating expense was £60 million in the year compared with £133 million in 2003. The charge in 2004 reflects provisions related to legal matters, partly offset by minor product divestments, sales of equity investments and other income.
| REPORT OF THE DIRECTORS | |
| Financial review 2007 | |
| Business review | |
| Financial review 2007 | |
| continued | |
Share of profits/(losses)after tax profits of associates and joint ventures and associated undertakings
The share of profits of associates arises principally from the Group’s holding in Quest Diagnostics Inc.
Disposal of interest in associatesDuring 2004, the Group disposed of 3.8 million shares from its investment in Quest Diagnostics Inc. for cash proceeds of £188 million, reducing the Group’s shareholding at 31st December 2004 to 18.6 per cent. After recognising a charge of £17 million for goodwill previously written off to reserves a profit of £139 million was recognised.
2004 Yearcontinued
| 2004 | 2003 | |||
| Net interest payable | £m | £m | ||
| Interest payable | (298 | ) | (214 | ) |
| Investment income | 102 | 61 | ||
| (196 | ) | (153 | ) | |
| Share of interest payable of associate | (7 | ) | (8 | ) |
| (203 | ) | (161 | ) | |
Net interest payable increased compared with 2003 largely as a result of a higher average effective Group interest rate and higher borrowings.
Profit on ordinary activities before taxation – business performance
Taking account of net other operating income/(expense),finance costs and the contribution from associates, and net interest payable, statutory profit before tax was £6,119 million, compared with business performance profit before tax of £6,703taxation was £7,790 million compared with £7,799 million in 2003,2006, an increase of two per cent (decline6% CER, but flat in sterling termsterms.
Taxation
| 2007 | 2006 | |||
| £m | £m | |||
| UK corporation tax | 452 | 400 | ||
| Overseas taxation | 1,962 | 2,310 | ||
| Current taxation | 2,414 | 2,710 | ||
| Deferred taxation | (272 | ) | (409 | ) |
| 2,142 | 2,301 | |||
The charge for taxation on total profit amounting to £2,142 million, represents an effective tax rate of nine per cent)28.7% (2006 – 29.5%) .
Merger The charge for taxation on business performance profit, amounting to £2,219 million, represents an effective tax rate of 28.5% (2006 – 29.5%) . The Group balance sheet at 31st December 2007 included a tax payable liability of £826 million and manufacturing restructuringThe merger and manufacturing programmes were substantially completed in 2003; consequently the Group is only reporting statutory results in 2004. The costsa tax recoverable asset of these programmes in 2003 were £390 million (£281 million after tax).£58 million.
| Taxation | ||||
| 2003 | ||||
| 2004 | (restated) | |||
| £m | £m | |||
| Business performance | (1,701 | ) | (1,838 | ) |
| Merger, restructuring and disposal of subsidiaries | – | 109 | ||
| Total | (1,701 | ) | (1,729 | ) |
The integrated nature ofGroup’s main open tax issues are in the Group’s worldwide operations, involving significant investment in researchUK, USA, Canada and strategic manufacture at a limited number of locations, with consequential cross-border supply routes into numerous end-markets, gives rise to complexity and delay in negotiations with revenue authorities as to the profits on which individual Group companies are liable to tax. Disagreements with, and between, revenue authorities as to intra-Group transactions, in particular the price at which goods should be transferred between Group companies in different tax jurisdictions, can produce conflicting claims from revenue authorities as to the profitsJapan.
GSK continues to be taxed in individual territories. Resolution of such issues is a continuing fact of life for GlaxoSmithKline. The Group has open issuesdispute with the revenue authorities in the USA, UK, Japan and Canada. By far the largest relates to Glaxo heritage products,HM Revenue & Customs (‘HMRC’) primarily in respect of transfer pricing and Controlled Foreign Companies (‘CFC’) matters for the years 1994 to date. HMRC have not yet formalised claims in respect of these matters and GSK is seeking to resolve them in discussions with HMRC. There continues, however, to be a wide difference between the Group and HMRC positions, which may ultimately have to be settled by litigation.
Following its audit of the period 2001 to 2003, the US Internal Revenue Service (IRS)(‘IRS’) has in Notices of Proposed Adjustment challenged deductions arising from intercompany financing arrangements for those years, with which GSK disagrees and UK Inland Revenue have made competing and contradictory claims.
GlaxoSmithKline has attempted to settle the US dispute, first through direct discussion with the IRS and subsequently through discussions between the US and UK authorities under the terms of the double tax convention between the two countries and discussions were terminated in July 2003. On 6th January 2004, the IRS issued a Notice of Deficiency for the years 1989-1996 claiming additional taxes of $2.7 billion. On 2nd April 2004 the Group filed a petition in the US Tax Court disputingwhich it will vigorously contest. GSK estimates that the IRS claim for tax and seeking a refund of $1 billion in taxes. On 25th January 2005 the IRS issued a further Notice of Deficiency for the years 1997-2000 claiming additional taxes of $1.9 billion.
If the IRS claims for the years 1989-2000 were upheld, the Group would additionally be liable for interest on late payment, estimated to amount to $3.0 billion,at 31st December 2007, net of federal tax relief at 31st December 2004, givingfor these years, is $680 million. GSK believes, supported by external professional advice, that this claim has no merit and that no adjustment is warranted. If, contrary to GSK’s view, the IRS prevailed in its argument before a total of $7.6 billioncourt, GSK would expect to have an additional liability for the years 1989-2000. The Group expectsfour year unaudited period 2004-2007 proportionate to fileits liability for the three year audited period 2001-2003. In the event that GSK is not able to resolve this issue with the IRS, a petition againstcourt decision would not be expected before 2010.
Lower courts in Japan have upheld claims by the tax claimsauthorities for 1997-2000 in April 2005, includingYen 39 billion (£177 million) relating to Japanese CFC legislation. GSK has paid and fully provided for the full tax but is pursuing a further claim for refund of taxes, and will askto the Tax Court to consolidate the IRS claims for all the years 1989-2000 intoJapanese Supreme Court. In Canada a single trial. A provisional trial date for the 1989-1996 claims has been set for October 2006.
As similar tax issues remain open for 2001 to date, GlaxoSmithKline expects to receive further substantial claims by the IRS for these years. GlaxoSmithKline continues to believe that the profits reported by its US subsidiaries for the period 1989 to date, on which it has paid taxes in the USA, are more than sufficient to reflect the activities of its US operations.
The Group is in continuing discussions with the Inland Revenuecourt hearing in respect of UK transfer pricing disputes.in the early 1990s was completed in July 2006. GSK is still awaiting the court’s judgement.
GlaxoSmithKlineGSK uses the best advice in determining its transfer pricing methodology and in seeking to manage transfer pricing and other taxation issues to a satisfactory conclusion and, on the basis of external professional advice, continues to believe that it has made adequate provision for the liabilities likely to arise from open assessments.
However, there continues to be a wide difference of views between the Group, the IRS, the Inland Revenue and other relevant taxation authorities where open issues exist. The ultimate liability for such matters may vary from the amounts provided and is dependent upon the outcome of litigation proceedings and negotiations with the relevant tax authorities.
Except as shown in this Annual Report, no provision has been madeProfit for taxation which would arise on the distribution of profits retained by overseas subsidiary and associated undertakings, on the grounds that no remittance of profit retained at 31st December 2004 is required in such a way that incremental tax will arise.year
| Earnings | ||||||||
| Growth | ||||||||
| 2003 | ||||||||
| 2004 | (restated) | CER% | £% | |||||
| Statutory earnings (£m) | 4,302 | 4,478 | 7 | (4 | ) | |||
| Basic earnings per share | 75.0 | p | 77.1 | p | 8 | (3 | ) | |
| Basic earnings per ADS | $2.74 | $2.53 | 8 | 8 | ||||
| Adjusted earnings (£m) | 4,302 | 4,759 | 1 | (10 | ) | |||
| Adjusted earnings per share | 75.0 | p | 82.0 | p | 2 | (9 | ) | |
| Adjusted earnings per ADS | $2.74 | $2.69 | 2 | 2 | ||||
| Weighted average number of shares (millions) | 5,736 | 5,806 | ||||||
| 2007 | 2006 | Growth | |||||
| £m | £m | CER% | £% | ||||
| Total profit after taxation for the year | 5,310 | 5,498 | 3 | (3 | ) | ||
| Total profit attributable to shareholders | 5,214 | 5,389 | 3 | (3 | ) | ||
| Basic earnings per share (pence) | 94.4 | p | 95.5 | p | 5 | (1 | ) |
| Basic earnings per ADS (US$) | $3.77 | $3.53 | |||||
| Business performance profit after taxation for the year | 5,571 | �� | 5,498 | 8 | 1 | ||
| Business performance profit attributable to shareholders | 5,475 | 5,389 | 8 | 2 | |||
| Adjusted earnings per share (pence) | 99.1 | p | 95.5 | p | 10 | 4 | |
| Adjusted earnings per ADS (US$) | $3.96 | $3.53 | |||||
| Weighted average number of shares (millions) | 5,524 | 5,643 | |||||
| Diluted total earnings per share (pence) | 93.7 | p | 94.5 | p | |||
| Diluted total earnings per ADS (US$) | $3.75 | $3.50 | |||||
| Weighted average number of shares (millions) | 5,567 | 5,700 | |||||
Adjusted earnings and adjusted earnings per share are presented above in order to illustrate business performance.
During the years 2000 to 2003, business performance was the primary performance measure used by management and was presented after excluding merger items, integration andTotal results including restructuring costs and disposalsrelated to the new Operational Excellence programme produced a basic EPS of businesses. Management believes that exclusion of these items provides94.4p compared with 95.5p in 2006. This was a better comparison of business5% increase in CER terms compared with 2006, but a 1% decline in sterling terms.
Business performance profit for the periods presented. For 2004, withyear was £5,571 million, an increase of 8% (1% in sterling terms). Profit attributable to minority interests was £96 million and profit attributable to shareholders was £5,475 million, an increase of 8% (2% in sterling terms). The interest cost of the completion of these programmes,share buy-back programme adversely impacts the Group is reporting results on a statutory basis only.
Adjusted earningsGroup’s profits but benefits EPS. Business performance EPS increased one per cent. Adjusted earnings per share increased two per cent10%, reflecting higher profits and also the reduction in the weighted average number of shares resulting from the Group’s share buy-back programme. The interest cost of this programme also impacts the Group’s earnings.
At actual rates of exchange, adjusted earnings per share declined nine per cent.increased 4%. The adverseunfavourable currency impact on EPS of 11six percentage points reflects the significant weakeningreflected a strengthening of Sterling against the US dollar relative to 2003 and comparescompared with a six per cent adversefour percentage point unfavourable currency impact on turnover. This difference principally arises from a different mix of currencies in profits compared with turnover.
Statutory EPS in 2004 was 75.0 pence compared with 77.1 pence in 2003. The sterling based decline in statutory EPS of three per cent reflected the significant weakening of the dollar. Excluding the effects of currency, statutory EPS grew eight per cent reflecting the completion of the Group’s merger and restructuring programmes in 2003 as well as underlying business growth.
Dividend
The Board has declared a fourth interim dividend of 1216 pence per share makingresulting in a totaldividend for the year of 4253 pence, per share. This compares with a totalfive pence increase over the dividend of 4148 pence per share for 2003.2006. The equivalent fourth interim dividend receivable by ADR holders is 44.43862.7264 cents per ADS based on an exchange rate of £1/$1.8516.1.9602. The dividend will have an ex-dividend date of 16th February 2005 and will be paid on 7th13th February 2008, with a record date of 15th February 2008 and a payment date of 10th April 20052008.
| 42 | GSK Annual Report 2007 |
Back to shareholders and ADR holders of record on 18th February 2005.Contents
| REPORT OF THE DIRECTORS | |
| Financial review 2007 | |
| Business review | |
| Financial review 2007 | |
| continued | |
Critical accounting policies
The consolidated Financialfinancial statements are prepared in accordance with UK generally accepted accounting principles,IFRS, as adopted for use in the European Union, and also with IFRS as issued by the IASB, following the accounting policies approved by the Board and described in Note 2 to the Financialfinancial statements, ‘Accounting policies’. Management is required to make estimates and assumptions that affect the amounts of assets, liabilities, revenue and expenses reported in the Financialfinancial statements. Actual amounts and results could differ from those estimates. The following are considered to be the critical accounting policies adopted.
TurnoverRevenue is recognised when title and risk of loss is passedadopted relate to the customerfollowing areas:
| • | Turnover |
| • | Taxation |
| • | Legal and other disputes |
| • | Impairment of property, plant & equipment |
| • | Intangible assets |
| • | Pensions and other post-employment benefits |
Information on the judgements and reliable estimates can be made of relevant deductions. Gross turnoverin these areas is reduced by rebates, discounts, allowancesgiven in Note 3 to the financial statements, ‘Key accounting judgements and product returns given or expected to be given, which vary by product arrangements and buying groups. These arrangements with purchasing organisations are dependent upon the submission of claims some time after the initial recognitionestimates’.
In respect of the sale. Provisions are made atTurnover accounting policy, the time of sale for the estimated rebates, discounts or allowances payable or returns to be made, based on available market information and historical experience. Because the amounts are estimated they may not fully reflect the final outcome, and the amounts are subject to change dependent upon, amongst other things, the types of buying group and product sales mix. The level of provision is reviewed and adjusted quarterly in the light of historical experience of actual rebates, discounts or allowances given and returns made and any changes in arrangements. Future events could cause the assumptions on which the provisions are based to change, which could affect the future results of the Group.
The Group’s largest business is US pharmaceuticals, and the US market has the most complex arrangements for rebates, discounts and allowances. The following briefly describes the nature of the arrangements in existence in the Group’s US pharmaceuticals business.
| • | |
Accruals for estimating chargebacks are calculated based on the termsof each agreement, historical experience and product growth | |
| • | Customer rebates are offered to key managed care and |
| • | The US Medicaid programme is a state-administered programmeproviding assistance to certain poor and vulnerable patients. In1990, the Medicaid Drug Rebate Program was established toreduce state and federal expenditure on prescription drugs. GSKparticipates by providing rebates to states. Accruals for Medicaidrebates are calculated based on the specific terms of individualstate agreements using a combination of historical experience,product and population growth, |
| • | Cash discounts are offered to customers to encourage |
| • | Where there is historical experience of customer returns, |
| 2007 | 2006 | 2005 | ||||||||||
| £m | % | £m | % | £m | % | |||||||
| Gross turnover | 11,826 | 100 | 13,131 | 100 | 11,875 | 100 | ||||||
| Chargebacks | 917 | 8 | 846 | 6 | 786 | 7 | ||||||
| Managed care, GPO rebates and Medicare Part D | 727 | 6 | 912 | 7 | 686 | 6 | ||||||
| US government and state programmes | 481 | 4 | 507 | 4 | 775 | 6 | ||||||
| Cash discounts | 208 | 2 | 248 | 2 | 227 | 2 | ||||||
| Customer returns | 131 | 1 | 140 | 1 | 155 | 1 | ||||||
| Prior year adjustments | (73 | ) | – | (69 | ) | – | (34 | ) | – | |||
| Other items | 162 | 1 | 194 | 1 | 174 | 1 | ||||||
| Total deductions | 2,553 | 22 | 2,778 | 21 | 2,769 | 23 | ||||||
| Net turnover | 9,273 | 78 | 10,353 | 79 | 9,106 | 77 | ||||||
Chargebacks have increased in 2007 as a result of gross turnoversignificant sales of product into US government stockpiles. Customer rebates have fallen compared with 2006 as a result of products with traditionally higher rebate percentages becoming subject to net turnover for the US pharmaceuticals business in 2004 is as follows:
| £m | % | |||
| Gross turnover | 10,835 | 100 | ||
| US Government and State programmes | 734 | 7 | ||
| Chargebacks | 732 | 7 | ||
| Managed care and group purchasing organisation rebates | 575 | 5 | ||
| Cash discounts | 208 | 2 | ||
| Customer returns | 86 | 1 | ||
| Other | 75 | – | ||
| Total deductions | 2,410 | 22 | ||
| Net turnover | 8,425 | 78 | ||
70GlaxoSmithKline Operatinggeneric competition and financial review and prospects
2004 Yearcontinuedbeing replaced with sales of newer products with lower rebate percentages.
The total provisionsaccruals for rebates, discounts, allowances and returns in the US pharmaceuticals business at 31st December 2004 and 31st December 2003 were as follows:
| At 31st | At 31st | |||
| December | December | |||
| 2004 | 2003 | |||
| £m | £m | |||
| US Government and State programmes | 362 | 262 | ||
| Chargebacks | 50 | 49 | ||
| Managed care and group purchasing | ||||
| organisation rebates | 297 | 311 | ||
| Cash discounts | 19 | 18 | ||
| Customer returns | 97 | 112 | ||
| Other | 31 | 38 | ||
| Total | 856 | 790 | ||
| At 31st | At 31st | |||
| December | December | |||
| 2007 | 2006 | |||
| £m | £m | |||
| Chargebacks | 38 | 50 | ||
| Managed care, GPO and Medicare, Part D rebates | 340 | 435 | ||
| US government and state programmes | 240 | 283 | ||
| Cash discounts | 21 | 24 | ||
| Customer returns | 194 | 184 | ||
| Other | 37 | 69 | ||
| Total | 870 | 1,045 | ||
A monthly process is operated to monitor stockinventory levels at wholesalers for any abnormal movements. This process uses gross sales volumes, prescription volumes based on third party data sources and information received from key wholesalers. The aim of this is to maintain stocksinventories at a consistent level from year to year based on the pattern of consumption.
On this basis, US pharmaceutical stockinventory levels at wholesalers and in other distribution channels at 31st December 20042007 were estimated to amount to less thanapproximately one month of turnover. This calculation uses third party information, the accuracy of which cannot be totally verified, but which is believed to be sufficiently reliable for this purpose.
Legal and other disputesGlaxoSmithKline provides for anticipated settlement costs where a reasonable estimate may be made of the likely outcome of the dispute and legal and other expenses arising from claims against the Group. The company’s Directors, having taken legal advice, have established provisions after taking into account insurance and other agreements and having regard to the relevant facts and circumstances of each matter and in accordance with accounting requirements. Provisions for product liability claims on certain products have been made on an ‘incurred but not reported’ basis where sufficient history of claims made and settlements is available. No provisions have been made for other unasserted claims or for claims for which no reasonable estimate of the likely outcome can yet be made. The ultimate liability for pending and unasserted claims may vary from the amounts provided, if any, and is dependent upon the outcome of litigation proceedings, investigations and possible settlement negotiations.
Impairment of fixed assetsThe carrying values of fixed assets subject to depreciation and amortisation are reviewed for impairment when there is an indication that the values of the assets might be impaired. Impairment is determined by reference to the higher of net realisable value and value in use, measured by reference to risk-adjusted future cashflows discounted using appropriate risk-free interest rates. These future cashflows are based on business forecasts and are therefore inherently judgemental. Future events could cause the assumptions used in these impairment reviews to change with a consequent adverse effect on the future results of the Group.
Intangible assetsWhere intangible assets are acquired by GlaxoSmithKline from third parties the costs of acquisition are capitalised. Licences to compounds in development are amortised over their estimated useful lives, but not exceeding 15 years. Estimated useful lives are reviewed annually and impairment reviews are undertaken if events occur which call into question the carrying values of the assets. Brands acquired with businesses are capitalised independently where they are separable and have a long-term value to the Group. Brands are amortised over their estimated useful lives, not exceeding 20 years, except where the end of the useful economic life cannot be foreseen. Where brands are not amortised, they are subject to annual impairment reviews. Impairment reviews are based on risk-adjusted future cash flows discounted using appropriate risk-free interest rates. These future cash flows are based on business forecasts and are therefore inherently judgemental. Future events could cause the values of these intangible assets to be impaired and this would have an adverse effect on the future results of the Group.
Pensions and post-retirement benefitsThe costs of providing pensions and other post-retirement benefits are charged to the profit and loss account in accordance with SSAP 24 over the period during which benefit is derived from the employee’s services. The costs are assessed in accordance with advice received from independent actuaries on the basis of assumptions selected by management. These assumptions include future earnings and pension increases, discount rates and expected long term rates of return on assets and are disclosed in Note 35 to the Financial statements, ‘Employee costs’. The expected long term rates of return on assets are determined based on long term government bond rates adjusted for risk and current market expectations. This Note also gives the additional disclosures required by FRS 17 ‘Retirement Benefits’. The selection of different assumptions could affect the future results of the Group.
Product rights and goodwillIn addition to the critical accounting policies outlined above, the accounting policy for product rights and goodwill is deemed to be important in respect of the balance sheet prepared in accordance with US accounting principles. Under US GAAP the merger of Glaxo Wellcome and SmithKline Beecham in 2000 was accounted for as an acquisition which gave rise to product rights of £24 billion and goodwill of £16 billion being recognised. Goodwill and those product rights determined to have indefinite lives are not amortised but rather reviewed annually for impairment. These impairment reviews assess business projections prepared as part of the Group’s annual budgeting and planning process to determine whether or not an impairment in the value of the goodwill has occurred. The business projections include assumptions about future events. Changes in future events could cause the assumptions in the business projections to change with a consequent adverse effect on the future results of the Group as reported under US GAAP.
| GSK Annual Report 2007 | 43 |
Operating and financial review and prospects GlaxoSmithKline 71
| REPORT OF THE DIRECTORS | |
| Financial position and resources | |
| Business review | |
| Financialposition and resources | |
| Financial position | ||||
| 2007 | 2006 | |||
| £m | £m | |||
| Assets | ||||
| Non-current assets | ||||
| Property, plant and equipment | 7,821 | 6,930 | ||
| Goodwill | 1,370 | 758 | ||
| Other intangible assets | 4,456 | 3,293 | ||
| Investments in associates and joint ventures | 329 | 295 | ||
| Other investments | 517 | 441 | ||
| Deferred tax assets | 2,196 | 2,123 | ||
| Derivative financial instruments | 1 | 113 | ||
| Other non-current assets | 687 | 608 | ||
| Total non-current assets | 17,377 | 14,561 | ||
| Current assets | ||||
| Inventories | 3,062 | 2,437 | ||
| Current tax recoverable | 58 | 186 | ||
| Trade and other receivables | 5,495 | 5,237 | ||
| Derivative financial instruments | 475 | 80 | ||
| Liquid investments | 1,153 | 1,035 | ||
| Cash and cash equivalents | 3,379 | 2,005 | ||
| Assets held for sale | 4 | 12 | ||
| Total current assets | 13,626 | 10,992 | ||
| Total assets | 31,003 | 25,553 | ||
| Liabilities | ||||
| Current liabilities | ||||
| Short-term borrowings | (3,504 | ) | (718 | ) |
| Trade and other payables | (4,861 | ) | (4,831 | ) |
| Derivative financial instruments | (262 | ) | (40 | ) |
| Current tax payable | (826 | ) | (621 | ) |
| Short-term provisions | (892 | ) | (1,055 | ) |
| Total current liabilities | (10,345 | ) | (7,265 | ) |
| Non-current liabilities | ||||
| Long-term borrowings | (7,067 | ) | (4,772 | ) |
| Deferred tax provision | (887 | ) | (595 | ) |
| Pensions and other post-employment benefits | (1,383 | ) | (2,339 | ) |
| Other provisions | (1,035 | ) | (528 | ) |
| Derivative financial instruments | (8 | ) | (60 | ) |
| Other non-current liabilities | (368 | ) | (346 | ) |
| Total non-current liabilities | (10,748 | ) | (8,640 | ) |
| Total liabilities | (21,093 | ) | (15,905 | ) |
| Net assets | 9,910 | 9,648 | ||
| Equity | ||||
| Share capital | 1,503 | 1,498 | ||
| Share premium account | 1,266 | 858 | ||
| Retained earnings | 6,475 | 6,965 | ||
| Other reserves | 359 | 65 | ||
| Shareholders’ equity | 9,603 | 9,386 | ||
| Minority interests | 307 | 262 | ||
| Total equity | 9,910 | 9,648 | ||
Financial position and resources
| Financial position | ||||
| 2003 | ||||
| 2004 | (restated) | |||
| £m | £m | |||
| Goodwill | 139 | 143 | ||
| Intangible fixed assets | 2,003 | 1,697 | ||
| Tangible fixed assets | 6,471 | 6,441 | ||
| Investments | 332 | 294 | ||
| Fixed assets | 8,945 | 8,575 | ||
| Equity investments | 153 | 164 | ||
| Stocks | 2,192 | 2,109 | ||
| Debtors | 7,309 | 6,897 | ||
| Liquid investments | 2,818 | 2,493 | ||
| Cash at bank | 1,161 | 962 | ||
| Current assets | 13,633 | 12,625 | ||
| Loans and overdrafts | (1,582 | ) | (1,452 | ) |
| Other creditors | (7,140 | ) | (7,019 | ) |
| Creditors: amounts due within one year | (8,722 | ) | (8,471 | ) |
| Net current assets | 4,911 | 4,154 | ||
| Total assets less current liabilities | 13,856 | 12,729 | ||
| Loans | (4,381 | ) | (3,651 | ) |
| Other creditors | (244 | ) | (232 | ) |
| Creditors: amounts due after one year | (4,625 | ) | (3,883 | ) |
| Provisions for liabilities and charges | (3,029 | ) | (3,042 | ) |
| Net assets | 6,202 | 5,804 | ||
| Called up share capital | 1,484 | 1,487 | ||
| Share premium account | 304 | 264 | ||
| Other reserves | (644 | ) | (804 | ) |
| Profit and loss account | 4,781 | 4,112 | ||
| Equity shareholders’ funds | 5,925 | 5,059 | ||
| Non-equity minority interests | – | 503 | ||
| Equity minority interests | 277 | 242 | ||
| Capital employed | 6,202 | 5,804 | ||
Tangible fixed assetsThe total cost of the Group’s tangible fixed assets at 31st December 2004 was £12.9 billion, with a net book value of £6.5 billion. Of this, land and buildings represented £2.8 billion,Property, plant and equipment £2.8 billion, computer software £0.2 billion and assets in construction £0.7 billion. In 2004, GlaxoSmithKline invested £993 million in new and renewal property, plant and equipment. This is mainly related to a large number of projects for the improvement and expansion of facilities at various worldwide sites. Property is mainly held freehold. New investment is financed from Group liquid resources. At 31st December 2004, the Group had capital contractual commitments for future expenditure of some £235 million and 2005 operating lease commitments of £83 million.
GlaxoSmithKline’s
GSK’s business is science-based, technology-intensive and highly regulated by governmental authorities. ItThe Group allocates significant financial resources to the renewal and maintenance of its property, plant and equipment to minimise risks of interruption of production and to achieve compliance with regulatory standards. A number of its processes use chemicals and hazardous materials.
The total cost of the Group’s property, plant and equipment at 31st December 2007 was £15,087 million, with a net book value of £7,821 million. Of this, land and buildings represented £2,978 million, plant and equipment £2,968 million and assets in construction £1,875 million. In 2007, GSK invested £1,583 million in new and renewal property, plant and equipment. This is mainly related to a large number of projects for the renewal, improvement and expansion of facilities at various worldwide sites. Property is mainly held freehold. New investment is financed from Group liquid resources. At 31st December 2007, GSK had capital contractual commitments for future expenditure of £597 million and 2008 operating lease commitments of £360 million. GSK believes that its facilities are adequate for its current needs.
The Group observes stringent procedures and uses specialist skills to manage environmental risks from these activities. Environmental issues, sometimes dating from operations now modified or discontinued, are reported under ‘Responsibility for environment, health and safety’ (page 31)29) and in Note 3044 to the Financialfinancial statements, ‘Legal proceedings’. GlaxoSmithKline believes that its facilities are adequate for its current needs.
Goodwill
Goodwill has increased during the year from £758 million at 31st December 2006 to £1,370 million. The increase reflects the goodwill arising on theacquisition of Reliant Pharmaceuticals of £350 million and Domantis of £181 million as well as a strengthening of overseas currencies on the translation of existing foreign currency goodwill balances.
Other intangible assets
Other intangible assets include the cost of intangibles acquired from third parties and computer software. The net book value of other intangible assets as at 31st December 2007 was £4,456 million (2006 – £3,293 million). The increase in 2007 reflects additions of £1,298 million and currency movements partly offset by the amortisation and impairment of existing intangibles. The largest element of the additions is £613 million relating to the acquisition of Reliant Pharmaceuticals Inc., which added a range of speciality medicines combating heart disease to the GSK portfolio, including the US marketing rights toLovaza.
InvestmentsGlaxoSmithKlineGSK held investments, including associates and joint ventures, with a carrying value at 31st December 20042007 of £485£846 million (2003(2006 – £458£736 million). The market value at 31st December 20042007 was £1,292£1,517 million (2003(2006 – £1,279£1,461 million). The largest of these investments is in an associate, Quest Diagnostics Inc., which had a book value at 31st December 2007 of £299 million (2006 – £262 million). The investments which include associates and joint ventures, are mainly in equity shares where the holding derives directly from the Group’s business. These investments include stakes in companies where the Group has research collaborations, which provide access to biotechnology developments of potential interest or interests in companies that arise from business divestments.
| 44 | GSK Annual Report 2007 |
| REPORT OF THE DIRECTORS | |
| Financial position and resources | |
| Business review | |
| Financial position and resources | |
| continued | |
Derivative financial instruments: assetsDebtors
GSK held both non-current and current derivative financial instruments held at fair value of £476 million (2006 – £193 million). The increase primarily reflects fluctuations in far forward valuations on foreign exchange contracts hedging inter-company loans and deposits. Exchange movements are largely due to changes in Euro, US dollar and Yen market rates.
Trade and other receivablesDebtorsTrade and other receivables of £5,495 million have increased in 2004from 2006 reflecting the timingimpact of year-end receipts, a higher deferred tax asset, insurancestrengthing overseas currencies on the translation of foreign currency receivables and additional cash contributions into the UK pension plan.partly offset by lower VAT recoverables.
Derivative financial instruments: liabilities
GSK held both non-current and current derivative financial instruments held at fair value of £270 million (2006 – £100 million) relating primarily to hedging exchange on translation of currency assets on consolidation. The increase again reflects the impact from Euro, US dollar and Yen currency fluctuations.
Trade and other payables
Trade and other payables amounting to £4,861 million have marginally increased from 2006 with the impact of strengthening overseas currencies on the translation of foreign currency payables partly offset by a decrease in customer return and rebate accruals.
Provisions
The Group carried deferred tax provisions and other short-term and non-current provisions of £3,029£2,814 million at 31st December 20042007 (2006 – £2,178 million) in respect of estimated future liabilities, of which £1,074£1,152 million related to legal and other disputes and £785 million related to pensions and other post-retirement benefits for employees.disputes.
Provision has been made for tax, legal and other disputes, indemnified disposal liabilities and the costs of manufacturing restructuring and merger integrationprogrammes to the extent that at the balance sheet date an actual or constructive obligation existed and could be reasonably estimated.
| Net debt | ||||
| Group net debt at 31st December comprised: | ||||
| 2004 | 2003 | |||
| £m | £m | |||
| Cash and liquid investments | 3,979 | 3,455 | ||
| Borrowings – repayable within one year | (1,582 | ) | (1,452 | ) |
| Borrowings – repayable after one year | (4,381 | ) | (3,651 | ) |
| Net debt | (1,984 | ) | (1,648 | ) |
Pensions and other post-employment benefits
The Group accounts for pension and other post-employment arrangements in accordance with IAS 19. The net deficits before allowing for deferred taxation were £411 million (2006 – £1,276 million) on pension arrangements and £972 million (2006 – £1,063 million) on unfunded post-employment liabilities. The pension liabilities decreased following improvements in asset values, further special funding contributions to the UK pension funds of £285 million (2006 – £346 million to the UK and US pension schemes) and a strengthening of long-term interest rates, including an increase in the rate used to discount UK pension liabilities from 5.0% to 5.75% . These benefits were partly offset by an improvement in mortality rates and a higher inflation assumption in the UK.
Net debt
| 2007 | 2006 | |||
| £m | £m | |||
| Cash, cash equivalents and liquid investments | 4,532 | 3,040 | ||
| Borrowings – repayable within one year | (3,504 | ) | (718 | ) |
| Borrowings – repayable after one year | (7,067 | ) | (4,772 | ) |
| Net debt | (6,039 | ) | (2,450 | ) |
Net debt increased by £336 million in 2004 to £1,984£3,589 million primarily due to the negative impact of foreign exchange on operating cash flows, the redemption of preference shares issued by a subsidiary, the settlement of some legal mattershigher share repurchases and the acquisition of the Fraxiparine and Arixtra businessbusinesses partly offset by increased cash inflows from Sanofi-Synthelabo.
PensionsThe Group continues to account for pension arrangements in accordance with SSAP 24. Under the transitional provisions of FRS 17 the disclosed pension assets and liabilities of the Group at 31st December 2004 show a net deficit after allowing for deferred taxation of £1,020 million (2003 – £1,300 million). Special cash contributions of £256 million were made in 2004 to reduce the funding deficits in the UK and US plans. This position will be reviewed annually and further contributions made as appropriate.
operating activities.
72GlaxoSmithKline Operating and financial review and prospects
Financial position and resourcescontinued
Shareholders’ fundsTotal equity
A summary of the movements in equity shareholders’ funds is set out below.
| 2003 | ||||
| 2004 | (restated) | |||
| £m | £m | |||
| At beginning of year, as previously reported | 7,720 | 6,581 | ||
| Prior period adjustment – implementation | ||||
| of UITF 17 (revised) and UITF 38 | (2,661 | ) | (2,741 | ) |
| Equity shareholders’ funds at beginning | ||||
| of year as restated | 5,059 | 3,840 | ||
| Profit for the year | 4,302 | 4,478 | ||
| Dividends | (2,402 | ) | (2,374 | ) |
| Shares issued on exercise of share options | 42 | 41 | ||
| Own shares purchased | (1,000 | ) | (980 | ) |
| Investment in ESOP shares | 26 | 33 | ||
| Exchange movements | (48 | ) | 106 | |
| Goodwill written back | 20 | – | ||
| Unrealised (loss)/profit on disposal | ||||
| of intellectual property | (1 | ) | 7 | |
| Tax on exchange movements and | ||||
| unrealised gains | (73 | ) | (92 | ) |
| At end of year | 5,925 | 5,059 | ||
| 2007 | 2006 | |||
| £m | £m | |||
| Total equity at beginning of year | 9,648 | 7,570 | ||
| Total recognised income and expense for the year | 6,134 | 5,395 | ||
| Dividends to shareholders | (2,793 | ) | (2,598 | ) |
| Ordinary shares issued | 417 | 316 | ||
| Ordinary shares purchased and held as Treasury shares | (3,537 | ) | (1,348 | ) |
| Ordinary shares purchased and cancelled | (213 | ) | – | |
| Consideration received for shares transferred by ESOP Trusts | 116 | 151 | ||
| Ordinary shares acquired by ESOP Trusts | (26 | ) | – | |
| Share-based incentive plans | 237 | 226 | ||
| Tax on share-based incentive plans | 4 | 21 | ||
| Changes in minority interest shareholdings | – | 2 | ||
| Minority interests | (77 | ) | (87 | ) |
| Total equity at end of year | 9,910 | 9,648 | ||
Equity shareholders’ fundsAt 31st December 2007, total equity had increased from £5,059£9,648 million at 31st December 20032006 to £5,925 million at 31st December 2004.£9,910 million. The increase arises principally from retained earnings partlyand actuarial gains on defined benefit pension plans in the year, partially offset by shares purchased and cancelled or held asfurther purchases of Treasury shares, and exchange movements on overseas net assets.shares.
Share purchases
In 2004,2007, the ESOPEmployee Share Ownership Plan (ESOP) Trusts did not make any market purchasesacquired £26 million of shares in GlaxoSmithKlineGSK plc (2003(2006 – nil)£nil). Shares are held by the Trusts to satisfy future exercises of options and awards under the Group share option and award schemes. A proportion of the shares held by the Trusts are in respect of awards where the rules of the scheme require the companyGSK to satisfy exercises through market purchases rather than the issue of new shares. The shares held by the Trusts are matched to options and awards granted and diminish the dilutive effect of new share issues on shareholders' capital and earnings.granted.
On 23rd October 2002, GlaxoSmithKline announced a second share repurchase programme of £4 billion. At the 2004 Annual General Meeting shareholders renewed approval for GlaxoSmithKline to make market purchases of its own shares. The exact amount and timing of future purchases will depend on market conditions and other factors. In 2004, GlaxoSmithKline purchased a total of 88 million shares, at a cost of £1 billion, under this programme. Of the total shares purchased in 2004, 18 million shares costing £201 million were cancelled, and the remaining 70 million shares costing £799 million are held as Treasury shares.
At 31st December 20042007, the ESOP Trusts held 174.5134.5 million GlaxoSmithKlineGSK shares at a carrying value of £2,574 million and market value of £2,133 million, against the future exercise of share options and share awards. The carrying value of £1,617 million has been deducted from other reserves. The market value of these shares was £1,721 million.
GSK repurchased £3,537 million of shares in 2007, to be held as Treasury shares and purchased a further £213 million for cancellation. In July 2007, GSK announced an increased buy-back programme to £12 billion, representing a £7.7 billion increase compared with continuation of the existing programme. This new programme is expected to be completed over a two year period including £6 billion in 2008. The exact amount and timing of future purchases, and the extent to which repurchased shares will be held as Treasury shares rather than being cancelled, will be determined by the company and is dependent on market conditions and other factors. At 31st December 2007, GSK held 504.2 million shares as Treasury shares, at a cost of £6,683 million, which has been deducted from retained earnings.
28.9 million shares have been purchased in the period 1st January 2008 to 22nd February 2008 at a cost of £323 million. All purchases were made through the publicly announced buy-back programme.
| GSK Annual Report 2007 | 45 |
| REPORT OF THE DIRECTORS | |
| Financial position and resources | |
| Business review | |
| Financial position and resources | |
| continued | |
Commitments and contingent liabilities
Financial commitments are summarised in Note 2639 to the Financialfinancial statements, ‘Commitments’. Other contingent liabilities and obligations in respect of short and long-term debt are set out in Note 2431 to the Financialfinancial statements, ‘Contingent liabilities’ and Note 2532 to the Financialfinancial statements, ‘Net debt’.
Amounts provided for pensions and post-retirement benefits are set out in Note 28 to the financial statements, ‘Pensions and other post-employment benefits’. Amounts provided for restructuring and integration plansprogrammes and legal, environmental and other disputes are set out in Note 2329 to the Financialfinancial statements, ‘Provisions for liabilities and charges’‘Other provisions’.
Contractual obligations and commitments
The following table sets out the Group’s contractual obligations and commitments at 31st December 2007 as they fall due for payment.
| Total | Under 1 yr | 1-3 yrs | 3-5 yrs | 5 yrs+ | Total | Under 1 yr | 1-3 yrs | 3-5 yrs | 5 yrs+ | |||||||
| £m | £m | £m | £m | £m | £m | |||||||||||
| Loans | 5,870 | 1,547 | 525 | 1,554 | 2,244 | 10,448 | 3,474 | 370 | 2,195 | 4,409 | ||||||
| Interest on loans | 5,170 | 393 | 646 | 634 | 3,497 | |||||||||||
| Finance lease obligations | 93 | 35 | 43 | 8 | 7 | 123 | 40 | 61 | 13 | 9 | ||||||
| Operating lease | ||||||||||||||||
| commitments | 407 | 83 | 127 | 78 | 119 | |||||||||||
| Intangible fixed assets | 1,256 | 145 | 317 | 264 | 530 | |||||||||||
| Tangible fixed assets | 235 | 208 | 27 | – | – | |||||||||||
| Finance lease charges | 14 | 5 | 3 | 1 | ||||||||||||
| Operating lease commitments | 360 | 101 | 134 | 74 | 51 | |||||||||||
| Intangible assets | 5,730 | 618 | 745 | 805 | 3,562 | |||||||||||
| Property, plant & equipment | 597 | 459 | 137 | 1 | – | |||||||||||
| Investments | 65 | 38 | 27 | – | ||||||||||||
| Purchase commitments | 159 | 72 | 54 | 24 | 9 | |||||||||||
| Pensions | 650 | 325 | – | |||||||||||||
| Other commitments | 85 | 25 | 55 | 5 | – | 32 | 20 | 7 | – | 5 | ||||||
| Total | 7,946 | 2,043 | 1,094 | 1,909 | 2,900 | 23,348 | 5,545 | 2,511 | 3,749 | 11,543 | ||||||
Commitments in respect of loans and future interest payable on loans are disclosed after taking into account the effect of derivatives.
The Group has entered into a number of research collaborations to develop new compounds with other pharmaceutical companies. The terms of these arrangements can include up-front fees, equity investments, loans and commitments to fund specified levels of research. In addition the Group will often agree to make further payments if future ‘milestones’ are achieved. As some of these agreements relate to compounds in the early stages of development, milestone payments will continue for a number of years if the compounds move successfully through the development process. Generally the closer the product is to marketing approval the greater the possibility of success. The payments shown above within intangible assets represent the maximum that would be paid if all milestones are achieved.
A number of new commitments were made in 20042007 under licensing and other agreements, principallyincluding arrangements with TheravanceAnacor Pharmaceuticals, Inc., Tanabe Seiyaka Co. Ltd, ExelixisOncomed Pharmaceuticals, Inc., Santaris Pharma A/S and Human Genome Sciences Inc.. Pension commitments are providedTargacept, Inc.
In 2006, GSK formalised an agreement with the trustees of the UK pension schemes to make additional contributions of up to £325 million per year, in Note 35addition to the Financialnormal contributions, over a four-year period ending 31st December 2009 in order to eliminate the then pension deficits on an IAS 19 basis by that point. The table opposite shows this commitment, but excludes the normal ongoing annual funding requirement of approximately £200 million. GSK has also committed to eliminate any future deficits that may arise over a rolling five-year period. No other commitments have been made past 31st December 2009. For further information on pension obligations, see Note 28 to the financial statements, ‘Employee costs’‘Pensions and other post-employment benefits’.
Contingent liabilities
The following table sets out contingent liabilities, comprising discounted bills, performance guarantees, letters of credit and other items arising in the normal course of business, and when they are expected to expire.
| Total | Under 1 yr | 1-3 yrs | 3-5 yrs | 5 yrs+ | ||||||
| £m | £m | £m | £m | £m | ||||||
| Guarantees | 48 | 37 | 4 | 5 | 2 | |||||
| Other contingent liabilities | 159 | 16 | 7 | 2 | 134 | |||||
| Total | 207 | 53 | 11 | 7 | 136 | |||||
| Total | Under 1 yr | 1-3 yrs | 3-5 yrs | 5 yrs+ | ||
| £m | £m | £m | £m | £m | ||
| Guarantees | 166 | 37 | 10 | – | 119 | |
| Other contingent liabilities | 40 | 13 | 9 | 4 | 14 | |
| Total | 206 | 50 | 19 | 4 | 133 | |
In the normal course of business the GroupGSK has provided various indemnification guarantees in respect of business disposals in which legal and other disputes have subsequently arisen. A provision is made where a reasonable estimate can be made of the likely outcome of the dispute and this is included in Note 2329 to the Financialfinancial statements, ‘Provisions for liabilities and charges’‘Other provisions’.
It is the Group’s policy to provide for the settlement costs of asserted claims and environmental disputes when a reasonable estimate may be made. Prior to this point no liability is recorded. Legal and environmental costs are discussed in ‘Risk factors’ on pages 7650 to 78.53 and Note 44 to the financial statements, ‘Legal proceedings’.
GlaxoSmithKlineGSK uses the best advice in determining its transfer pricing methodology and, on the basis of external professional advice, continues to believe that it has made adequate provision for the liabilities likely to arise from open taxation assessments. The ultimate liability for such matters may vary significantly from amounts provided and is dependent upon the outcome of litigation proceedings and negotiations with the relevant tax authorities. This is discussed further in Note 1214 to the Financialfinancial statements, ‘Taxation’.
| 46 | GSK Annual Report 2007 |
| REPORT OF THE DIRECTORS | |
| Financial position and resources | |
| Business review | |
| Financial position and resources | |
| continued | |
Cash flow
A summary of the consolidated cash flow statement is set out below:below
| 2003 | ||||
| 2004 | (restated) | |||
| £m | £m | |||
| Net cash inflow from operating activities | 6,527 | 7,005 | ||
| Dividends from joint ventures and | ||||
| associated undertakings | 11 | 1 | ||
| Returns on investment and servicing of finance | (252 | ) | (231 | ) |
| Taxation paid | (1,583 | ) | (1,917 | ) |
| Capital expenditure and financial investment | (1,035 | ) | (954 | ) |
| Acquisitions and disposals | (69 | ) | (12 | ) |
| Equity dividends paid | (2,475 | ) | (2,333 | ) |
| Net cash inflow before management | ||||
| of liquid resources and financing | 1,124 | 1,559 | ||
| Management of liquid resources | (413 | ) | (1,336 | ) |
| Shares purchased | (1,000 | ) | (980 | ) |
| Other financing | 546 | 730 | ||
| Increase/(decrease) in cash in the year | 257 | (27 | ) | |
| Reconciliation of net cash flow to movement in net debt | ||||
| 2004 | 2003 | |||
| £m | £m | |||
| Net debt at beginning of year | (1,648 | ) | (2,335 | ) |
| Increase/(decrease) in cash in the year | 257 | (27 | ) | |
| Cash outflow from management | ||||
| of liquid resources | 413 | 1,336 | ||
| Net increase in long-term loans | (1,350 | ) | (1,023 | ) |
| Net repayment of short-term loans | 407 | 442 | ||
| Exchange and other movements | (63 | ) | (41 | ) |
| Net debt at end of year | (1,984 | ) | (1,648 | ) |
| 2007 | 2006 | |||
| £m | £m | |||
| Net cash inflow from operating activities | 6,161 | 4,357 | ||
| Net cash outflow from investing activities | (3,009 | ) | (1,521 | ) |
| Net cash outflow from financing activities | (1,741 | ) | (4,792 | ) |
| Increase/(decrease) in cash and bank overdrafts | 1,411 | (1,956 | ) | |
| Exchange adjustments | 48 | (254 | ) | |
| Cash and bank overdrafts at beginning of year | 1,762 | 3,972 | ||
| Cash and bank overdrafts at end of year | 3,221 | 1,762 | ||
| Cash and bank overdrafts at end of year | ||||
| comprise: | ||||
| Cash and cash equivalents | 3,379 | 2,005 | ||
| Overdrafts | (158 | ) | (243 | ) |
| 3,221 | 1,762 | |||
The net cash inflow from operating activities after taxation paid was £6,527£6,161 million, a decreasean increase of £478£1,804 million over 2003,2006, arising mainly because a gross taxation payment of $3.3 billion (£1.8 billion) under the US transfer pricing dispute settlement was made in 2006 (see Note 14 the financial statements, 'Taxation'.).
The net cash outflow from investing activities was £3,009 million, an increase of £1,488 million which reflected increased capital expenditure and the negativepurchase of businesses, including Reliant Pharmaceuticals for £794 million and Domantis for £218 million, net of cash acquired.
Cash returned to shareholders
Free cash flow was £3,857 million, an increase of 47% over 2006, principally reflecting the impact of foreign exchangethe US tax settlement in 2006 partly offset by higher levels of capital expenditure. Free cash flow is the amount of cash generated by the business after meeting its obligations for interest, tax and dividends paid to minority interests, and after capital expenditure on non-current tangible and intangible assets.
Free cash flow is used by GSK’s management for planning and reporting purposes and in discussions with and presentations to investment analysts and rating agencies. GSK’s free cash flow measure is not defined in IFRS. This measure may not be directly comparable with similarly described measures used by other companies. A reconciliation of net cash inflow from operating activities, which is the settlementclosest equivalent IFRS measure, to free cash flow is shown below.
Reconciliation of some legal matters.free cash flow
| 2007 | 2006 | |||
| £m | £m | |||
| Net cash inflow from operating activities | 6,161 | 4,357 | ||
| Purchase of non-current tangible assets | (1,516 | ) | (1,366 | ) |
| Purchase of non-current intangible assets | (627 | ) | (224 | ) |
| Disposal of non-current tangible fixed assets | 35 | 43 | ||
| Interest paid | (378 | ) | (414 | ) |
| Interest received | 247 | 299 | ||
| Dividends received from joint ventures and | ||||
| associated undertaking | 12 | 15 | ||
| Dividends paid to minority interests | (77 | ) | (87 | ) |
| Free cash flow | 3,857 | 2,623 | ||
Movements in net debt
| 2007 | 2006 | |||
| £m | £m | |||
| Net debt at beginning of year | (2,450 | ) | (1,237 | ) |
| Increase/(decrease) in cash and | ||||
| bank overdrafts | 1,411 | (1,956 | ) | |
| Cash outflow from liquid investments | 39 | 55 | ||
| Net increase in long-term loans | (3,276 | ) | – | |
| Net (increase in)/repayment of short-term loans | (1,632 | ) | 739 | |
| Exchange and other movements | (131 | ) | (51 | ) |
| Net debt at end of year | (6,039 | ) | (2,450 | ) |
| GSK Annual Report 2007 | 47 |
| REPORT OF THE DIRECTORS | |
| Financial position and resources | |
| Business review | |
| Financial position and resources | |
| continued | |
Investment appraisalGlaxoSmithKlineGSK has a formal process for assessing potential investment proposals in order to ensure decisions are aligned with the Group’s overall strategy. This process includes an analysis of the impact of the project on profitearnings, its return on invested capital and an assessment of the return based on discounted cash flows. The discount rate used to perform financial analysis is decided internally, to allow determination of the extent to which investments cover the Group’s cost of capital. For specific investments the discount rate may be adjusted to take into account country or other risk weightings.
Capital expenditure and financial investment
Cash payments for tangible and intangible fixed assets amounted to £1,043£2,143 million (2003(2006 – £1,062£1,590 million). Disposals realised £53£44 million (2003(2006 – £46£218 million). Cash payments to acquire equity investments of £103£186 million (2003(2006 – £63£57 million) were made in the year and sales of equity investments realised £58£45 million (2003(2006 – £125£32 million).
Future cash flow
The Group expects that future operating cash flow will be sufficient to fund its operating and debt service costs, to satisfy normal levels of capital expenditure, to meet obligations under existing licensing agreements and to meet other routine outflows including tax and dividends, subject to the risk factors discussed on pages 76 and 78. The Group50 to 53. GSK may from time to time have additional demands for finance, such as for acquisitions. The GroupIt has access to other sources of liquidity from short and long-term capital markets and banks and other financial institutions, in addition to the cash flow from operations, for such needs.
Payment policies
Group companies are responsible for monitoring and managing their working capital. The terms of sales collections and supplier payments reflect local commercial practice.
In the UK, the company and each of its UK subsidiaries have policies to ensure that suppliers are paid on time. In particular, the UK companies seek:
| • | to settle terms of payment with suppliers when agreeing the terms of the transaction |
| • | to ensure that suppliers are made aware of the agreed terms of payment |
| • | to abide by the terms of payment. |
The policy includes arrangements for accelerated payment of small suppliers.
Payment performance
At 31st December 2004,2007, the average number of days’ purchases represented by trade and fixed asset creditors of the parent company was nil (2003(2006 – nil) and in respect of the company and its UK subsidiaries in aggregate was 2124 days (2003(2006 – 2124 days).
Financial position and resourcescontinued
Treasury policies
GlaxoSmithKline plc reports in sterlingSterling and pays dividends out of sterlingSterling profits. The role of Corporate Treasury in GlaxoSmithKlineGSK is to manage and monitor the Group’s external and internal funding requirements and financial risks in support of Group corporate objectives. Treasury activities are governed by policies and procedures approved by the Board and monitoredof Directors, most recently on 5th October 2007.
A Treasury Management Group (TMG) chaired by the Group’s Chief Financial Officer, meets on a monthly basis to review treasury activities. Its members receive management group.
GlaxoSmithKline maintainsinformation relating to treasury activities. The Corporate Executive Team (CET) also review a monthly finance report which focuses on operational finance issues. The Group’s internal auditors review the treasury internal control systems and procedures to monitor foreign exchange, interest rate, liquidity, credit and other financial risks.environment regularly.
LiquidityCapital managementThe GroupGSK operates globally, primarily through subsidiary companies established in the markets in which the Group trades. Due to the natureWith significant levels of the Group’s business, with patent protection on many of the products in the Group’s portfolio, the Group’s products compete largely on product efficacy rather than on price. Selling margins are sufficient to cover normal operating costs and the Group’s operating subsidiaries are substantiallygenerally cash generative.
Operating cash flow is used to fund investment in the research and development of new products as well as to make the routine outflows of capital expenditure, tax, dividends and repayment of maturing debt. In July 2007, GSK announced an increased share buy-back programme of £12 billion over the period to July 2009 which will result in substantially increased borrowings.
The Group’s policy is to borrow centrally, using a variety of capital market issues and borrowing facilities, to meet anticipated funding requirements.
These borrowings, together with cash generated from operations, are on-lent, contributed as equity to certain subsidiaries or used to fund the Group’s £12 billion share buy-back programme, due to complete by July 2009.
Liquidity
The Group may, from time to time, have additional demands formanages its net borrowing requirements through a portfolio of long-term borrowings, including bonds, together with short-term finance such as for share purchases and acquisitions.
GlaxoSmithKline operates withunder a high level of interest cover and at low levels of net debt relative to its market capitalisation. In addition to the strong positive cash flow from normal trading activities, additional liquidity is readily available via itsUS$10 billion commercial paper programme and short-term investments. programme. At 31st December 2007, the Group also had $5 billion committed undrawn bank facilities.
The Group also has an uncommitted Euroa European Medium Term Note programme of £5£10 billion, of which £2,526 million£7.2 billion was in issue as at 31st December 2004. In March 2004, the Group established2007, and a US Shelf Registration of $5 billion; at 31st December 2004 $2,4772007, $2 billion (£1,290) million1 billion) was in issue. The TMG monitors the cashflow forecast of GSK on a monthly basis.
The Group’s long-term borrowings mature at dates between 2008 and 2042. On 18th February 2008 GSK’s long-term Standard and Poor’s debt rating was revised from AA with negative outlook to A+ stable. At this time, Standard and Poor’s also revised GSK’s short-term rating for paper issued under the Group’s commercial paper programme from A-1+ to A-1. Moody’s Investors’ Services rate GSK as A1 with negative outlook for long-term debt and P-1 for short-term debt. There has been no change to GSK’s rating from Moody’s since 25th July 2007.
In the light of likely increased commercial paper issuance resulting from the increased share buy-back programme, GSK has increased its committed bank facilities from $900 million to $5 billion. In addition, the Group maintains substantial cash and liquid investments which amounted to £4.5 billion at 31st December 2007.
| 48 | GSK Annual Report 2007 |
| REPORT OF THE DIRECTORS | |
| Financial position and resources | |
| Business review | |
| Financial position and resources | |
| continued | |
Treasury operations
The objective of treasury activity is to manage the post-tax net cost/income of financial operations to the benefit of Group earnings. Corporate Treasury does not operate as a profit centre.
GlaxoSmithKline GSK uses a variety of financial instruments, including derivatives, to finance its operations and to manage market risks from those operations. Financial instruments comprise cash and liquid resources, borrowings and spot foreign exchange contracts.
A number of derivative financial instruments are used to manage the market risks from Treasury operations. Derivative instruments,Derivatives, principally comprising forward foreign currency contracts, interest rate and currency swaps, are used to swap borrowings and liquid assets into the currencies required for Group purposes and to manage exposure to funding risks from changes in foreign exchange ratesrate and interest rates.
GlaxoSmithKline balances the use of borrowings and liquid assets having regard to: the cash flow from operating activities and the currencies in which it is earned; the tax cost of intra-Group distributions; the currencies in which business assets are denominated; and the post-tax cost of borrowings compared to the post-tax return on liquid assets.
Liquid assets surplus to the immediate operating requirements of Group companies are generally invested and managed centrally by Corporate Treasury. Requirements of Group companies for operating finance are met whenever possible from central resources.
External borrowings, mainly managed centrally by Corporate Treasury, comprise a portfolio of long and medium-term instruments and short-term finance.
GlaxoSmithKlineGSK does not hold or issue derivative financial instruments for tradingspeculative purposes and the Group’s Treasurytreasury policies specifically prohibit such activity. All transactions in financial instruments are undertaken to manage the risks arising from underlying business activities, not for speculation.
Funding, maturity and counterparty riskThe Group invests centrally managed liquid assets in government bonds, short-term corporate debt instruments with a minimum short-term credit rating of A-1/P-1, money market funds with a credit rating of AAA/Aaa and fully collateralised preference share investments. (Credit ratings shown are from Standard and Poor’s and Moody’s Investors’ Services respectively).
The Group manages its net borrowing requirements through a portfolio of long and medium-term borrowings, including bonds, together with short-term finance under the US $10 billion commercial paper programme. In April 2004 a $500 million 3 year 2.375 per cent coupon bond, a $500 million 10 year 4.375 per cent coupon bond and a $1,500 million 30 year 5.375 per cent coupon bond were issued under the US Shelf Registration established in March 2004.
The Group’s medium-term borrowings mature at dates between 2005 and 2014, the private financing matures in 2032, the long-dated sterling bond matures in 2033 and the long-dated dollar bond matures in 2034. The private financing may be redeemed by GlaxoSmithKline at any time and, in particular, in the event of any accelerating event that would increase the cost of funding for the Group. GlaxoSmithKline’s long-term debt rating is AA from Standard and Poor’s and Aa2 from Moody’s Investors’ Services. The agencies’ short-term ratings for paper issued under the Group’s commercial paper programme are A-1+ and P-1 respectively.
Foreign exchange risk managementIn GlaxoSmithKline foreignForeign currency transaction exposure arising on normal trade flows, in respect of both external and intra-Group trade, is not hedged. GlaxoSmithKline’s policy is to minimise theThe exposure of overseas operating subsidiaries to transaction risk is minimised by matching local currency income with local currency costs. For this purpose, intra-Group trading transactions are matched centrally and intra-Group payment terms are managed to reduce risk. ExceptionalExceptionally foreign currency cash flows are hedged selectively under the management of Corporate Treasury.
A significant proportionThe Group manages centrally the short-term cash surpluses or borrowing requirements of Group borrowings, includingsubsidiary companies and uses forward contracts to hedge future repayments back into the commercial paper programme, is in US dollars, to benefit from the liquidity of US dollar denominated capital markets. Certain of these and other borrowings are swapped into other currencies as required for Group purposes. originating currency.
The Group seeks to denominate borrowings in the currencies of its principal assets.assets and cash flows. These are primarily denominated in US dollars, Euros and Sterling. Certain borrowings are swapped into other currencies as required for Group purposes.
Borrowings denominated in, or swapped into, foreign currencies that match investments in overseas Group assets are treated as a hedge against the relevant net assets. The ratio of borrowings to assets is reviewed by currency on a month-by-month basis by the TMG.
Based on the composition of net debt at 31st December 2004 a 10 per cent appreciation in sterling against major currencies would result in a reduction in the Group’s net debt of approximately £120 million. A 10 per cent weakening in sterling against major currencies would result in an increase in the Group’s net debt of approximately £150 million.
Interest rate risk managementGlaxoSmithKline’sGSK’s policy on interest rate risk management requires that the minimum amount of net borrowings at fixed rates increasesto increase with the ratio of forecast net interest payable to trading profit. The fixed to floating ratio is reviewed monthly by the TMG.
The Group uses a limited number of interest rate swaps to redenominate external borrowings into the interest rate coupon required for Group purposes. The duration of these swaps matches the duration of the principal instruments. Interest rate derivative instruments are accounted for as fair value or cash flow hedges of the relevant assets or liabilities, where possible.
The Group manages centrally the short-term cash surpluses or borrowing requirements of subsidiary companies and uses forward contracts to hedge future repayments back into originating currency.
Sensitivity analysis considers the sensitivity of the Group’s net debt to hypothetical changes in market rates and assumes that all other variables remain constant. Based on the composition of net debt at 31st December 2004 a one percentage point (100 basis points) increase or decrease in average interest rates would result in a negligible change in the Group’s annual interest expense.
Equity risk managementEquity investments classified as current assets are available for sale and the Group manages disposals to meet overall business requirements as they arise. The Group regularly monitors the value of its equity investments and only enters into hedges selectively with the approval of the Board.liabilities.
Financial assets and liabilities
An analysis of net debt is given in Note 2532 to the Financialfinancial statements, ‘Net debt’. An analysis of financial assets and liabilities at carrying value and fair value and a reconciliation to net debt areis given in Note 3441 to the Financialfinancial statements, ‘Financial instruments and related disclosures’, together with a discussion of derivative financial instruments and quantitative disclosures about market risk in accordance with the requirements of Financial Reporting Standard 13..
The Group continues to benefit from strong positive cash flow.flow from operating activities. Group net debt would have decreased significantly in the year to 31st December 2004,2007, but for the Group’s purchase of its own shares in the market of £3.8 billion and acquisitions of approximately £1 billion.
The financial assets and liabilities at 31st December 20042007 are representative of the treasury policies and strategies of GlaxoSmithKline,GSK applied consistently duringsince July 2007. At that time, GSK announced a changed financial strategy, involving an increased share buy-back programme of £12 billion, which will result in substantially increased borrowings.
From July 2007 onwards, GSK tightened its criteria for holding cash equivalents and liquid investments in response to the year. There werecredit crisis. GSK has suffered no significant changes in such policies throughout the year.loss of principal as a result of this crisis.
| GSK Annual Report 2007 | 49 |
| REPORT OF THE DIRECTORS | |
| Outlook and risk factors | |
| Business review | |
Outlook and risk factors
Outlook
Sales growth of existing products and launchlaunches of new products are key drivers of GlaxoSmithKline’s business performance. It GSK’s business. The sales growth from key products such asSeretide/Advair, vaccines,Valtrex and the high potential products,Avodart,Arixtra andBonivais anticipated thatexpected to continue in 2008. Sales growth is also expected from newer productsLovaza, Cervarix,Tykerb/Tyverb,Rotarix,Veramyst/Avamys andAltabax/ Altargo. Sales growth ofAvandia, GSK’s product for diabetes, has been adversely impacted following publication in May 2007 of a number of new products will be launched in 2005. meta-analysis.
Typically, sales of existing products decline dramatically when generic competition is introduced either on patent expiry or earlier if there is a successful challenge to the Group’s patent. GlaxoSmithKlineIn 2007, generic competitors toCoreg IR entered the US market. Several other products will become exposed to generic competition in the USA during 2008, includingWellbutrin XL 150mg,Requip IR,Lamictal IR, Paxil CR andImitrex. GSK is engaged in legal proceedings regarding the validity and infringement of the Group’s patents relating to many of its products. These are discussed in ‘Risk factors’ below and in Note 3044 to the Financialfinancial statements, ‘Legal proceedings’.
On 4th March 2005,GSK expects a sustained flow of new products in the US Food and Drug Administration (FDA) halted distribution of supplies of Paxil CR and Avandamet due to manufacturing issues at the Group’s Cidra, Puerto Rico facility.
The company is working with the FDA to resolve the manufacturing issues with these products as quickly as possible, although the timing of this and the financial impact on the company's earningsnext two years. Thirteen new product opportunities are currently uncertain.filed with regulators; these includePromacta (USA),Rotarix (USA),Treximet(USA) andSynflorix (EU and International). GSK currently has 34 key assets in phase III development/registration.
Subject to this uncertainty GSK’sIn its published earnings guidance for 2005 remains2008 GSK expects that the impact of lowerAvandia sales, together with increase generic competition, will lead to a mid-single digit percentage decline in business performance EPS, percentage growth in the low double-digit range (atat constant exchange rates) on an International Financial Reporting Standards basis.
The Group has net debt of about £2 billion, which is low relative to its market capitalisation, and this positions it to take advantage of any opportunities that might arise to build the business.rates.
There are risks and uncertainties inherent in the business whichthat may affect future performance including R&D projects, anticipated sales growth and expected earnings growth. These are discussed in ‘Risk factors’factors ‘ below.
Risk factors
There are risks and uncertainties relevant to the Group’s business.business, financial conditions and results of operations. The factors listed below are among those that the Group thinks could cause the Group’s actual results to differ materially from expected and historical results.results, as could other risks and uncertainties not currently known to the Group or which the Group currently deems immaterial.
Risk that R&D will not deliver commercially successful new products
Continued development of commercially viable new products as well as the development of additional uses for existing products is critical to the Group’s ability to replace sales of older products that decline upon expiration of exclusive rights, and to increase overall sales. Developing new products is a costly, lengthy and uncertain process.
A new product candidate can fail at any stage of the process, and one or more late-stage product candidates could fail to receive regulatory approval.
New product candidates may appear promising in development but, after significant investments,investment, fail to reach the market or have only limited commercial successsuccess. This, for example, could be as a result of efficacy or safety concerns, inability to obtain necessary regulatory approvals, difficulty or excessive costs to manufacture, erosion of patent term as a result of a lengthy development period, infringement of patents or other intellectual property rights of others or inability to differentiate the product adequately from those with which it competes. The successful development
Health authorities such as the US FDA, the European Medicines Agency and the Japan Pharmaceuticals and Medicines Device Agency have increased their focus on safety when assessing the benefit/risk balance of the Group’s research and development pipeline is of particular importance indrugs. In light of the recentthis increased scrutiny, and anticipated expiration of patent or data exclusivity forother factors, there has been a reduction in the number of new drugs gaining regulatory approvals in recent years. For example, the Group’s largest selling products.FDA approved only 19 new drugs in 2007, the lowest single-year total since 1983.
Risk of unplanned loss or expiration of patents or marketing exclusivity
Patent infringement litigation
The Group’s patents, in common with all patents, can be challenged at any time. Efforts by generic manufacturers may involve challenges to the validity or enforceability of a patent or assertions that the alternative compounds dotheir generic product does not infringe the Group’s patents. If the Group is not successful during the patent protection or data exclusivity periods in defending an attack on its patents and maintaining exclusive rights to market one or more of its major products, particularly in the USA where the Group has its highest turnover and margins, the Group’s turnover and margins would be adversely affected.
See Note 3044 to the Financialfinancial statements, ‘Legal proceedings’, for a discussion of patent-related proceedings in which the Group is involved.involved and page 28 for a description of resolution of prior proceedings which affect the dates on which generic versions of the Group’s products may be introduced.
Generic drug manufacturers are seeking to market generic versions of many of the Group’s most important products, includingSeretide/Advair, Avandia, Zofran, Wellbutrin XL, Imitrex, Lamictal and Valtrex, prior to the expiration of the Group’s patents, and have exhibited a readiness to do so for other products in the future. GenericThe US launch of generic products competitivecompeting withAugmentinCoreg IR,Paxil Zofran,FlonaseandWellbutrin SR XLwere launched in the USA in 2002, 2003 and 2004, respectively, and had a significant impact on the Group’s overall turnover and earnings.earnings for 2007.
Potential changes in intellectual property laws and regulations
Proposals to change existing patent and data exclusivity laws and regulations in major markets in which the Group sells its products are a continuing feature of the political process in those countries, including proposals that could have the effect of making prosecution of patents for new products more difficult and time-consuming or adversely affecting the exclusivity period for the Group’s products, including biological products. Should such proposals be enacted they could have an adverse impact on the Group’s future sales and results of operations.
| 50 | GSK Annual Report 2007 |
| REPORT OF THE DIRECTORS | |
| Outlook and risk factors | |
| Business review | |
| Outlook and risk factors | |
| continued | |
Weakness of intellectual property protection in certain countries
In some of the countries in which the Group operates, patent protection may be significantly weaker than in the USA or the European Union. In addition, in an effort to control public health crises, some developing countries, such as South Africa and Brazil, have considered plans for substantial reductions in the scope of patent protection for pharmaceutical products. In particular, these countries could facilitate competition within their markets from generic manufacturers who would otherwise be unable to introduce competing products for a number of years.
Any loss of patent protection, including abrogation of patent rights or compulsory licensing, is likely to affect adversely the Group’s operating results in those national markets but is not expected to be material to the Group overall. Absence of adequate patent protection could limit the opportunity to look to such markets for future sales growth.
Risk of substantial adverse outcome of litigation and government investigations
See Note 3044 to the Financialfinancial statements, ’Legal proceedings’, for a discussion of proceedings and governmental investigations – involving matters which if proven could give rise to civil and/or criminal liabilities – in which the Group is currently involved. Unfavourable resolution of these and similar future proceedings or investigations may have a material adverse effect on the Group’s financial results.condition and results of operations. The Group has made material provisions in 20032005, 2006 and 20042007 related to legal proceedings and investigations which reduced its earnings. The Group may also make additional significant provisions related to legal proceedings and investigations in the future, which would reduce its earnings. In many cases the practice of the plaintiff bar is to claim damages – compensatory, punitive and statutory – indamagesin amounts that bear no relationship to the underlying harm. Accordingly it is potentially misleading to quantify the potential exposure to claims, proceedings and investigations of the type described in Note 30.44 to the financial statements 'Legal proceedings'.
Recent insurance loss experience, including pharmaceutical product liability exposures, has increased the cost of, and narrowed the coverage afforded by, insurance for pharmaceutical companies generally, including the Group.
In order to contain insurance costs in 2004 and 2005recent years the Group has continued to adjust its coverage profile, accepting a greater degree of un-insured exposure. In addition, where future claims are made under insurance policies, insurers may reserve the right to deny coverage on various grounds. If denial of coverage is ultimately upheld on these claims, this could result in material additional charges to the Group’s earnings.
Product liability litigation In other instances third parties may perform analyses of published clinical trial results which, although not necessarily accurate or meaningful, may raise questions regarding safety of pharmaceutical products which may be publicised by the media and may result in product liability claims. The Group is currently a defendant in a number of product liability lawsuits, including class actions, that involve substantial claims for damages related to the Group’s pharmaceutical products. Litigation, particularly in the USA, is inherently unpredictable and excessive verdicts that are not justified by the evidence can occur. Class actions that sweep together all persons who were prescribed the Group’s products can inflate the potential liability by the force of numbers. Claims for pain and suffering and punitive damages are frequently asserted in product liability actions and, if allowed, can represent potentially open-ended exposure. Anti-trust litigation Risks of competition, price controls and limitations on sales The Group had If these or any of the Group’s other major products were to become subject to a problem such as unplanned loss of patent protection, unexpected side effects, regulatory proceedings, publicity affecting doctor or patient confidence or pressure from competitive products, or if a new, more effective treatment should be introduced, the adverse impact on the Group’s revenues and operating results could be significant. In particular, the Group faces intense competition from manufacturers of generic pharmaceutical products in all of its major markets. Generic products often enter the market upon expiration of patents or data exclusivity periods for the Group’s products. Introduction of generic products typically leads to a dramatic loss of sales and reduces the Group’s revenues and margins for its proprietary products. The expiration dates for patents for the Group’s major products and a description of litigation settlements which may affect the dates on which generic versions of the Group’s products may be introduced are set out on Governmental and payer controls The Group cannot predict whether existing controls, pressures or restrictions will increase or new controls, pressures or restrictions will be introduced that will reduce the Group’s margins or affect adversely its ability to introduce new products profitably. For example, in the USA, where the Group has its highest margins and the most sales for any country, pricing pressures could significantly increase These trends may adversely affect the Group’s revenues and margins from sales in the USA. Regulatory controls Health authorities have increased their focus on safety when assessing the benefit risk/balance of drugs in the context of not only initial product approval but also in the context of approval of additional indications and review of information regarding marketed products. Stricter regulatory controls also heighten the risk of changes in product profile or withdrawal by regulators on the basis of In addition, in some cases the Group may voluntarily cease marketing a product Risk of interruption of product supply Although the Group undertakes business continuity planning, single sourcing for certain components, bulk active materials and finished products creates a risk of failure of supply in the event of regulatory non-compliance or physical disruption at the manufacturing sites. Risk from concentration of sales to wholesalers Reliance on information technology Taxation Disruption from pandemic influenza Environmental liabilities Global political and economic conditions The Group has no control over changes in inflation and interest rates, foreign currency exchange rates and controls or other economic factors affecting its businesses or the possibility of political unrest, legal and regulatory changes or nationalisation in jurisdictions in which the Group operates. These factors could materially affect the Group’s future results of operations. Accounting standards Regulators regularly review the financial statements of listed companies like GSK for compliance with accounting and regulatory requirements. The Group believes that it complies with the appropriate regulatory requirements concerning its financial statements and disclosures. However, other companies have experienced investigations into potential non-compliance with accounting and disclosure requirements that have resulted in restatements of previously reported results and sometimes significant penalties. Human resources In accordance with US SEC disclosure requirements, the following discussion compares results for the year to 31st December All growth rates Exchange The currencies that most influence the Group’s results are the US World market – pharmaceuticals Global pharmaceutical sales increased by At 30th September Pharmaceutical turnover All growth rates included in the review of turnover are at constant exchange rates (CER) unless otherwise stated. The sterling growth rates may be found in the tables of pharmaceutical turnover. Total pharmaceutical turnover in Pharmaceutical turnover by therapeutic area growth products coupled with sales and marketing excellence. These growth products includeSeretide/Advair, the Respiratory TotalWellbutrin sales grew 24% to £900 million. Sales ofWellbutrin XL, a once-daily product, grew 25% to £798 million. In Pharmaceutical turnover by therapeutic area CER% represents Sales of Metabolic In 2006, sales of theAvandia product group grew In December, GSK presented data from the landmark ADOPT study, which demonstrated thatAvandia is more effective than metformin, or a sulphonylurea, in long-term blood sugar control in type 2 diabetes. These data are in addition to those recently presented from the DREAM study, which showed thatAvandia can reduce the risk of progression to type 2 diabetes. Data from both these studies are expected to be filed with regulatory agencies during the first half of 2007. GSK recorded in turnover a £95 million share of co-promotion income forBoniva/Bonviva, a new once-monthly oral bisphosphonate for the Vaccines Sales of new vaccines also helped drive overall sales growth. Total sales ofRotarix, for rotavirus,Boostrix, for prevention of diphtheria, tetanus and whooping cough, and influenza vaccines,Fluarix/ FluLaval, reached £274 million, up 91%. This was the first full year sales ofFluLaval following the acquisition of ID Biomedical in late 2005. Oncology and emesis Cardiovascular and urogenital Anti-bacterials Other therapeutic areas Consumer Healthcare sales grew 6% to £3.1 billion, with sales in International up 10% and Europe up 7%, performing well. Total sales in the USA were flat, with an improved performance in the OTC medicines Oral care Nutritional healthcare Cost of sales Selling, general and administration Research and development Gains from Net finance costs Finance income increased compared with 2005 predominantly due to increased income on Share of The 29.5% (2005 – 28.5%) . TheOperating and financial review and prospects GlaxoSmithKline77
Pre-clinical and clinical trials are conducted during the development of potential products to determine the safety and efficacy of products for use by humans following approval by regulatory bodies. Notwithstanding these efforts, when drugs and vaccines are introduced into the marketplace, unanticipated side effects may becamebecome evident.
In the USA it has become increasingly common that following publicity around government investigations or an adverse outcome in prosecution of patent infringement actions, the defendants and direct and indirect purchasers and other payers initiate anti-trust actions as well. Claims by direct and indirect purchasers and other payers are typically filed as class actions and the relief sought may include treble damages and restitution claims. Damages in adverse anti-trust verdicts are subject to automatic trebling in the USAUSA. Similarly, anti-trust claims may be brought following settlement of patent litigation, alleging that such settlements are anti-competitive and in violation of anti-trust laws.Governmental investigationsSales, marketing and regulation
The Group operates globally in complex legal and regulatory environments that often vary among jurisdictions. The failure to comply with applicable laws, rules and regulations in these jurisdictions may result in civil and criminal legal proceedings. As those rules and regulations change or as governmental interpretation of those rules and regulations evolve, prior conduct may be called into question. In the USA, for example, the Group is responding to federal and state governmental investigations into pricing, marketing and reimbursement of its prescription drug products. These investigations could result in related restitution or civil false claims act litigation on behalf of the federal or state governments, as well as related proceedings initiated against the Group by or on behalf of consumers and private payers. Such proceedings may result in trebling of damages awarded or fines in respect of each violation of law. Criminal proceedings may also be initiated against Group companies or individuals.
Third party competition
The Group operates in highly competitive businesses. In the pharmaceuticals business, it faces competition both from proprietary products of large international manufacturers and producers of generic pharmaceuticals. Significant product innovations, technical advances or the intensification of price competition by competitors could adversely affect the Group’s operating results. The Group cannot predict the timing or impact of competitive products or their potential impact on sales of the Group’s products. Continued consolidation in the pharmaceutical industry could adversely affect the Group’s competitive position, while continued consolidation among the Group’s customers may increase pricing pressures. GSK Annual Report 2007 51 REPORT OF THE DIRECTORS Outlook and risk factors Business review Outlook and risk factors continued 12eight products with over £500 million in annual global sales in 2004.2007. Among these products arePaxil IR and Augmentin IR, with respect to each of which the Group now faces generic competition, and Zofran, Imitrex, Valtrex, Lamictal andAvandia, with respect to which the Group is currently defending itshas generic competition, andAvandia,Imitrex,Lamictal andValtrex, with respect to which the Group’s intellectual property rights in the USA and are currently the subject of litigation or settlement agreements related to such litigation. Group has had generic competition in the USA forFlonaseCoreg IR, for which the FDA has not yet approved any generic version following expiry of the US patent in mid-2004.another significant product, since September 2007.pages 30 to 31 and legalpage 28. Legal proceedings involving patent challenges are set out in Note 3044 to the Financialfinancial statements, ‘Legal proceedings’.
Pharmaceutical products are subject to price controls or pressures and other restrictions in many markets, including Japan, Germany, Spain, France and Italy. Some governments intervene directly in setting prices. In addition, in some markets major purchasers of pharmaceutical products (whether governmental agencies or private health care providers) have the economic power to exert substantial pressure on prices or the terms of access to formularies.upon implementation ofas experience develops under the pharmaceutical benefit under Medicare, or in the event that other state programmes to control the cost of pharmaceutical are adopted. Once the Medicare programme initiates outpatient pharmaceutical coverage for itsprogramme covering Medicare beneficiaries that began in 2006, the US government, or the2006. The private insurers through which coverage will beis offered, through their enormous purchasing power under the programme, could demand discounts that may implicitly create price controls on prescription drugs. Changes to the enabling legislation could afford the US government a direct role in negotiating prices under the Medicare programme. Additionally a number of states have proposed or implemented various schemes to control prices for their own senior citizens’ drug programmes, including importation from other countries and bulk purchasingpurchases of drugs. The growth in the number of patients covered through large managed care institutions in the USA, which is likely to increasehas increased with implementation of the Medicare amendments,benefit, also increases pricing pressures on the Group’s products. Until the terms of implementation of the Medicare pharmaceutical benefit have been finalised, it is not possible to quantify the impact of that benefit on the Group’s financial results.78GlaxoSmithKline Operating and financial review and prospectsOutlook and risk factors continued
The Group must comply with a broad range of regulatory controls on the testing, approval, manufacturing and marketing of many of its pharmaceutical and consumer healthcare products, particularly in the USA and countries of the European Union, that affect not only the cost of product development but also the time required to reach the market and the uncertainty of successfully doing so.approvals previously granted,post-approval concerns over product safety, which wouldcould reduce revenues and can result in product recalls and product liability lawsuits. There is also greater regulatory scrutiny, especially in the USA, on advertising and promotion and in particular on direct-to-consumer advertising.(for example the withdrawal of Lotronex shortly after its initial launch in the USA) or face declining sales based on concerns about efficacy or safety (for example, declines in sales ofAvandia in 2007 following publicity around questions regarding risks associated with the product), whether or not scientifically justified, even in the absence of regulatory action. The development of the post-approval adverse event profile for a product or the product class may have a major impact on the marketing and sale of the product.
The manufacture of pharmaceutical products and their constituent materials requires compliance with good manufacturing practice regulations. The Group'sGroup’s manufacturing sites are subject to review and approval by the FDA and other regulatory agencies. Compliance failure by suppliers of key services and materials or the Group’s own manufacturing facilities could lead to product recalls and seizures, interruption of production and delays in the approvals of new products pending resolution of manufacturing issues. Non-compliance can also result in fines and disgorgement of profits. In addition, whileAny interruption of supply or fines or disgorgement remedy could materially and adversely affect the Group’s financial results. For example, during resolution of FDA observations of deficiencies in manufacturing practices at the Group’s Cidra, Puerto Rico facility, as referred to in Note 44 to the financial statements, ‘Legal proceedings’, supplies of certain products manufactured at that site were curtailed or constricted which had an adverse impact on sales in 2005 and 2006. The FDA has recently seized Paxil CR and Avandamet tablets manufactured at the Group's Cidra, Puerto Rico facility on grounds that those products failed to meet FDA manufacturing standards. That facility has been the subject of FDA observations of possible deficiencies in manufacturing practices to which the Group responded by, among other things, voluntarily recalling certain shipments of Paxil CR and Avandamet from wholesalers. See note 30 to the Financial statements, 'Legal proceedings'. The Group continues to cooperate with the FDA in responding to the observations and in respect of the recent seizures, but there can be no assurance as to any remedy the FDA may ultimately seek or as to the timing of resumption of distribution of Paxil CR and/or Avandamet. In 2004 Paxil CR and Avandamet accounted for £396 million and £222 million in sales, respectively. Any interruption of supply or fines or disgorgement remedy could materially and adversely affect the Group's financial results.
In the USA, in line with other pharmaceutical companies, the Group sells its products through a small number of wholesalers in addition to hospitals, pharmacies, physicians and other groups. Sales to the three largest of whichwholesalers amounted to approximately 80 per cent85% of the Group’s US pharmaceutical sales. At 31st December 2007 the Group had trade receivables due from these three wholesalers totalling £915 million (31st December 2006 – £1,044 million). The Group is exposed to a concentration of credit risk in respect of these wholesalers such that, if one or more of them is affected by financial difficulty, it could materially and adversely affect the Group’s financial results.52 GSK Annual Report 2007 REPORT OF THE DIRECTORS Outlook and risk factors Business review Outlook and risk factors continued
The Group is increasingly dependent on information technology systems, including Internet-based systems, for internal communication as well as communication with customers and suppliers. Any significant disruption of these systems, whether due to computer viruses or other outside incursions, could materially and adversely affect the Group’s operations.
The effective tax rate on the Group’s earnings benefits from the fact that a portion of its earnings is taxed at more favourable rates in some jurisdictions outside the UK. Changes in tax laws or in their application with respect to matters such as transfer pricing, foreign dividends, controlled companies or a restriction in tax relief allowed on the interest on intra-Group debt, could increase the Group’s effective tax rate and adversely affect its financial results. The Group has open issues with the revenue authorities in the UK, the USA, Japan and Canada. These matters are discussed in Note 14 to the financial statements, ‘Taxation’.
In the event of pandemic influenza, the Group could be subject to disruption from a range of factors. National governments may be more willing to abrogate intellectual property rights for medicines that might otherwise be in short supply. In a country afflicted by pandemic ‘flu, there would be a risk that employees and their families will be affected with the consequence that sales and distribution and manufacturing activities could be shut down and supply continuity – for active ingredients and finished goods – affected.
The environmental laws of various jurisdictions impose actual and potential obligations on the Group to remediate contaminated sites. The Group has also been identified as a potentially responsible party under the US Comprehensive Environmental Response Compensation and Liability Act at a number of sites for remediation costs relating to the Group’s use or ownership of such sites. Failure to manage properly the environmental risks could result in additional remedial costs that could materially and adversely affect the Group’s operations. See Note 3044 to the Financialfinancial statements, ‘Legal proceedings’, for a discussion of environmental-related proceedings in which the Group is involved.Reliance on information technologyThe Group is increasingly dependent on information technology systems, including Internet-based systems, for internal communication as well as communication with customers and suppliers. Any significant disruption of these systems, whether due to computer viruses or other outside incursions, could materially and adversely affect the Group’s operations.TaxationThe effective tax rate on the Group’s earnings benefits from the fact that a portion of its earnings is taxed at more favourable rates in some jurisdictions outside the UK. Changes in tax laws or in their application with respect to matters, such as transfer pricing and the risk of double taxation, that relate to the portion of the Group’s earnings taxed at more favourable rates, could increase the Group’s effective tax rate and adversely affect its financial results. The Group has open issues with the revenue authorities in the USA, UK, Japan and Canada. By far the largest relates to Glaxo heritage products, in respect of which the US Internal Revenue Service and UK Inland Revenue have made competing and contradictory claims. These matters are discussed in Note 12 to the Financial statements, ‘Taxation’.
The Group conducts a substantial portion of its operations outside the UK. The Group’s management of foreign exchange rates is discussed in Operating and financial review and prospects,Business Review, ‘Foreign exchange risk management’ (see page 49). Fluctuations in exchange rates between sterlingSterling and other currencies, especially the US dollar, the Euro and the Japanese yen,Yen, could materially affect the Group’s financial results.
New or revised accounting standards, rules and rulesinterpretations promulgated from time to time by the UK, US or international accounting standard setting boardsboard could have a material adverseresult in changes to the recognition of income and expense that may adversely impact on the Group’s reported financial results. With the adoption of International Financial Reporting Standards (IFRS),standard changes in the market valuation of certain financial instruments (such as the equity collar linked to the Group’s investment in Quest Diagnostics the put and call options linked to the Group’s strategic alliance with Theravance and impairments of equity investments) will beare reflected in the Group’s reported results before those gains or losses are actually realised and could have a significant impact on the profit and lossincome statement in any given period. Also accounting for deferred taxation on inter-company inventory may give rise to volatility depending upon the ownership of the inventory at the balance sheet date.
The Group has approximately 100,000103,000 employees around the world and is subject to laws and regulations concerning its employees – ranging from discrimination and harassment to personal privacy to labour relations – that vary significantly from jurisdiction to jurisdiction. The Group faces intense competition for qualified individuals from other pharmaceutical and biotechnology companies, universities, governmental entities and other research institutions. Failure to comply with applicable requirementscontinue to recruit and retain the right people and maintain a culture of compliance could have a significant adverse affecteffect on the Group. GSK Annual Report 2007 53 REPORT OF THE DIRECTORS Financial review 2006 Business review Operating and financialFinancial review and prospects GlaxoSmithKline2006792003 Year20032006 with the results for the year to 31st December 2002.2005. included in the review of turnover are at constant exchange rates (CER) unless otherwise stated. The sterling growth rates may be found in the tabletables of pharmaceutical salesturnover by therapeutic area on page 81.55.Dollar,dollar, the Euro and the Japanese Yen.The pound hit its highest levelIn 2006, the US dollar fell by 14% against the dollarpound, to $1.96 at the year-end. The year-end rates for more than three years, climbing to $1.79the Euro weakened by 1% and the Euro gained 20 per centJapanese Yen by 15% against the dollar in 2003, the first year that the Dollar has fallen in value against the Euro, as investors weighed up the impact of continued unrest in Iraq, tensions elsewhere in the world and concerns for the US economy.Sterling.almost nine per cent CER (five per cent sterling)8% in 20032006 to £279£328 billion.World market by
geographic regionValue
£bn % of
total Growth CER £% World market by Value % of Growth geographic region £bn total £% USA 127 46 11 2 145.0 44 9 Europe 76 27 8 15 92.8 28 6 France 17.6 5 4 Germany 15 5 7 15 16.6 5 3 France 14 5 6 14 UK 9 3 11 11 10.8 3 3 Italy 9 3 5 13 10.5 3 7 Japan 31 11 2 (1 ) 31.3 10 (3 ) Asia Pacific 19 7 9 4 23.3 7 14 Latin America 12 4 (3 ) (11 ) 15.9 5 21 Middle East, Africa 8 3 17 13 11.3 3 13 Canada 6 2 12 11 8.3 3 19 Total 279 100 9 5 327.9 100 8 TheGrowth in the US market, although less buoyant than 2002 maintained double digit growth and now represents 46 per centmarketincreased to 9%, representing 44% of the global prescription pharmaceutical market compared to 31 per centwith 30% a decade ago.earlier.2003, GlaxoSmithKline2006, GSK held second position in the world pharmaceutical market with a market share of 6.9 per cent,6.3%, behind Pfizer with a market share of 10.3 per cent. GlaxoSmithKline8%. GSK had seven products insix of the world’s top 5060 pharmaceutical products; these are products. These wereAugmentin, Avandia Imigran/,Imitrex, Lamictal,Seretide/Advair, Seroxat/Paxil, Valtrex,WellbutrinandZofran.Zofran.World market –
top five therapeutic classesValue
£bn % of
total Growth CER £% Cardiovascular 47 17 7 4 Central nervous system 46 16 13 8 Alimentary tract and metabolic 36 13 8 4 Anti-infectives (bacterial, viral and fungal) excluding vaccines 31 11 7 2 Respiratory 20 7 2 (2 ) (Note: data based on 12 months to 30th September 2003.) World market – top five therapeutic classes Value % of Growth £bn total CER% £% Cardiovascular 54.5 17 6 7 Central nervous system 54.0 16 7 8 Alimentary tract and metabolic 39.8 12 7 9 Anti-infectives (bacterial, viral and fungal) excluding vaccines33.2 10 1 3 Respiratory 21.7 7 5 6 (Note: data based on 12 months to 30th September 2006.) turnover by therapeutic area on page 81.20032006 was £18,181£20,078 million compared with £17,995£18,661 million in 2002,2005, an increase of five per cent. Approximately one per cent of this overall growth came from price increases. Growth in9% CER. In sterling terms of one per cent was significantly impacted by the weakness of the US dollar and other currencies.Within the Group’s portfolio, turnover of new products launched in a major market within the last five years accounted for 25 per cent of total turnover and grew by 29 per cent to £4,633 million. Turnover of the more established, franchise products amounted to £9,888 million representing 54 per cent of total turnover and grew one per cent compared to last year. Turnover of older products, now less actively promoted, was £3,660 million, a decline of eight per cent, representing 21 per cent of total turnover.Global pharmaceutical turnover inincreased 8%, 1% less than CER due principally to the fourth quarterstrength of 2003 declined two per cent, reflecting a US turnover decline of six per cent to £2,188 million; whereas in Europe turnover grew two per cent to £1,363 million, and inSterling against major International turnover grew four per cent to £964 million. Turnover in the US declined due to generic competition to Paxil which began in September 2003.currencies.GlaxoSmithKline’sGSK’s ability to continuein 2006 to deliver continued pharmaceutical turnover growth despite generic competition to several of its products, iswas primarily due to an exceptionally broad product portfolio of fast-growing, high-value products. Respiratory product SeretideAvandia/Advair (£2.2 billion) up 39 per cent, the diabetes treatment Avandia/Avandamet (£0.9 billion) up 24 per cent, Wellbutrin for depression (£0.9 billion) up 18 per cent, the emesis treatment Zofran (£0.8 billion) up 16 per cent, product group, Vaccines,Lamictalfor epilepsy (£0.6 billion) up 31 per cent, Trizivir, for HIV (£0.4 billion) up 22 per cent, Valtrexfor herpes (£0.5 billion) up 23 per cent, ,Coregfor heart disease (£0.4 billion) up 28 per cent,Requip,Avodart and the pediatric vaccine InfanrixBoniva/Pediarix (£0.3 billion) up 32 per cent..Central nervous system (CNS)CNS sales grew four per cent to £4,455 million. Sales in the USA and Europe grew three per cent. International sales grew 15 per cent.Sales of Seroxat/Paxil, GlaxoSmithKline’s leading product for depression and anxiety disorders, declined four per cent to £1,877 million. US sales declined nine per cent to £1,179 million following the launch of a generic paroxetine in September 2003. GlaxoSmithKline's innovative new product Paxil CR, increased its share of total Paxil prescriptions (branded and generic) since the generic launch from 33 per cent to 37 per cent. Paxil CR sales in 2003 were £387 million. In Europe Seroxat sales declined eight per cent to £369 million reflecting competition and pricing pressures. International sales grew 25 per cent to £329 million led by continued strong growth in Japan.80GlaxoSmithKline Operating and financial review and prospects2003 Year continuedSales of Wellbutrin, for depression, grew 18 per cent to £953 million, reflecting increased physician awareness of the product’s outstanding efficacy and favourable side-effect profile. A new once-daily formulation, Wellbutrin XL, was launched in September 2003. This formulation accounted for 40 per cent of branded Wellbutrin prescriptions in early February 2004 and seven per cent of sales in 2003.Limited generic competition to Wellbutrin began in the USA in January 2004 for the 100mg dose.GlaxoSmithKline’s medicine for epilepsy, Lamictal, continued to grow across all regions achieving sales of £556 million, up 31 per cent. In June 2003, the FDA approved Lamictal for long-term maintenance treatment of bi-polar disorder.GlaxoSmithKline continuesGSK continued to be the global leader in respiratory pharmaceuticals with sales of its three key products,Seretide/Advair,Flixotide/FloventandSerevent, amounting to £3.4£4.3 billion, up 17 per cent. Sales9%. Total sales ofSeretide/Advair, the Group’s largest product, grew 39 per centfor asthma and COPD, rose 11% to £2.2 billion although this contributed to declines in Serevent and Flixotide, its constituent products. Seretide/Advair is now one of the top ten pharmaceutical brands in the world.£3.3 billion. In the USA, sales grew 54 per cent13% to £1,235 million.Seretide also continued£1.9 billion. In Europe, sales grew 10% to perform strongly in Europe (up 18 per cent) and International markets (up 37 per cent). The growth prospects for Advair were further strengthened with an FDA approval for use in the treatment of COPD in the fourth quarter 2003.The older respiratory products Ventolin and Becotide continued to decline as patients converted to newer products.Anti-viralsHIV medicines grew across all regions and totalled £1.5 billion in sales, up six per cent. Sales of Trizivir, GlaxoSmithKline’s triple combination therapy, grew 22 per cent to £376 million. Lexiva, for HIV, was launched in December 2003, with initial sales of £7 million.Global sales of Valtrex, which received FDA approval in August 2003 to reduce the risk of transmission of genital herpes, rose 23 per cent to £499 million.Anti-bacterialsAnti-bacterial sales declined 16 per cent worldwide and 41 per cent in the USA. Augmentin’s US sales were down 51 per cent in the year as a result of generic competition that began in the third quarter 2002.In the USA, GlaxoSmithKline’s two new antibiotics, Augmentin ES for children, and Augmentin XR for adults, recorded combined sales of £237 million in 2003 in spite of generic competition.MetabolicWorldwide sales for the metabolic category were £1.1 billion up 20 per cent. The Avandia franchise (Avandia andAvandamet) grew 24 per cent for the year with US sales up 20 per cent to £755 million.Avandamet, a combination of Avandia and metformin HCI, expanded the Avandia metabolic franchise with its US launch in the fourth quarter 2002. In Europe, Avandia has benefited from increasing physician acceptance with sales of £70 million, up 57 per cent. The franchise should benefit further from the EU approval of Avandamet in December 2003. Avandia also did very well in International markets, with sales grew 9% to over £300 million. Market share by value in the anti-asthma and COPD therapy class was 29% in Europe and 33% in the USA, an increase of £106 million, up 40 per cent.2 percentage points in Europe and a flat market share growth in the USA (reflecting lower prescription volumes due to a label change in early 2006 that restricted GSK’s ability to promote the product, offset by favourable pricing changes).VaccinesCNS
CNS sales increased 15% to £3.6 billion. Sales of vaccines grew two per cent to £1.1 billion, supported by the Infanrix/Pediarix franchise, up 32 per cent to £336 million. The hepatitis franchise declined 13 per cent to £417 million reflecting competitive pressureincreased in the USA and International, but declined in Europe due to generic competition. TotalSeroxat/Paxil sales grew 4% to £620 million, due to strong growth ofPaxil CR in the USA andPaxil IR in Japan partly offset by generic competition toPaxil IR in Europe.the USA, GlaxoSmithKline’s new Pediarix vaccine was launched in January 2003. Pediarix adds protection against hepatitis B and poliomyelitisDecember 2006, generic competition to theInfanrix Wellbutrin XLcombination and results in up to six fewer injections for infants.300mg tablet (approximately 60% ofWellbutrin sales) entered the US market.Cardiovascular and urogenitalIn 2003, Sales ofCoreg Lamictalsales grew 28 per cent to £361 million, benefiting from recent data that showed a highly significant statistical difference in survival between Coreg and metoprolol in patients with heart failure.Levitra (vardenafil), a new agent for the treatment of erectile dysfunction, was launched in the USA in August 2003epilepsy and in Europe in the first halfbipolar disorder, grew 19% to just under £1 billion, benefiting from its new indication to treat one of the year. most serious forms of epilepsy – primary generalised tonic-clonic seizures.Levitra Lamictalwas researched and developed by Bayer AG and is co-promotedalso the only medicine with GlaxoSmithKline.long-term clinical data that demonstrates that it can delay the onset of depressive episodes of bipolar disorder.OncologySales ofRequip, for Parkinson’s disease and emesisSales of Zofran Restless Legs Syndrome (RLS), grew 16 per cent74% to £774 million, driven by a strong US performance, up 20 per cent to £575£268 million.Other therapeutic areasSales of Zantac fell 13 per cent to £328 million with declines in all regions.54 GSK Annual Report 2007 Operating and financialREPORT OF THE DIRECTORSFinancial review and prospects 2006Business review GlaxoSmithKlineFinancial review 200681continued20032006 Total USA Europe International Total USA Europe International Growth Growth Growth Growth Therapeutic area/ % of 
2003 2002 2003 2003 2003 % of 2006 2005 Growth 2006 Growth 2006 Growth 2006 Growth major products total £m £m CER% £% £m CER% £% £m CER% £m £m CER% £% total £m £m CER% £% £m CER% £% £m CER% £% £m CER% £% CNS 25 
4,455 4,511 4 (1 ) 3,112 3 (6 ) 847 3 10 496 15 14 Depression 2,830 2,937 2 (4 ) 2,107 1 (7 ) 369 (8 ) (2 ) 354 25 23 Seroxat/Paxil 1,877 2,055 (4 ) (9 ) 1,179 (9 ) (17 ) 369 (8 ) (2 ) 329 25 23 Wellbutrin 953 882 18 8 928 18 8 – – – 25 30 25 Migraine 849 888 1 (4 ) 609 (1 ) (9 ) 179 3 11 61 7 7 Imigran/Imitrex 760 798 – (5 ) 560 (1 ) (9 ) 147 3 11 53 7 8 Naramig/Amerge 89 90 1 (1 ) 49 (3 ) (9 ) 32 7 14 8 7 – Lamictal 556 438 31 27 311 38 26 202 26 34 43 9 8 Requip 99 89 13 11 47 9 – 47 15 24 5 43 25 Zyban 75 99 (25 ) (24 ) 28 (35 ) (40 ) 32 12 19 15 (45 ) (40 ) Respiratory 24 
4,417 3,987 14 11 2,242 21 11 1,481 4 10 694 13 11 27 4,995 5,054 – (1 ) 2,461 (3 ) (5 ) 1,697 3 2 837 4 3 Serevent, Seretide/Advair Flixotide/Flovent 3,352 2,937 17 14 1,750 23 12 1,170 7 15 432 18 19 Seretide/Advair 2,214 1,631 39 36 1,235 54 41 773 18 27 206 37 40 3,313 3,003 11 10 1,870 13 11 1,133 10 10 310 9 10 Flixotide/Flovent 705 783 (8 ) (10 ) 319 (10 ) (18 ) 208 (10 ) (5 ) 178 1 1 659 638 5 3 298 16 14 173 (8 ) (8 ) 188 2 – Serevent 433 523 (15 ) (17 ) 196 (27 ) (33 ) 189 (5 ) (1 ) 48 26 26 291 330 (10 ) (12 ) 86 (16 ) (17 ) 140 (13 ) (13 ) 65 5 (2 ) Flixonase/Flonase 594 534 19 11 461 22 12 56 1 8 77 14 12 311 656 (52 ) (53 ) 184 (63 ) (64 ) 51 (15 ) (15 ) 76 (14 ) (16 ) Ventolin 265 265 (1 ) – 4 (50 ) (50 ) 134 (5 ) 1 127 7 2 Becotide 111 130 (16 ) (15 ) – – – 93 (15 ) (11 ) 18 (23 ) (28 ) Central nervous system 17 3,642 3,219 15 13 2,588 28 26 595 (15 ) (15 ) 459 2 (1 ) Seroxat/Paxil 620 615 4 1 175 35 32 149 (20 ) (20 ) 296 5 – Paxil IR 448 488 (5 ) (8 ) 19 11 6 149 (20 ) (20 ) 280 4 (1 ) Paxil CR 172 127 37 35 156 38 36 – – – 16 25 33 Wellbutrin 900 739 24 22 882 24 22 2 – – 16 7 14 Wellbutrin IR, SR 102 92 12 11 89 14 11 2 – – 11 – 10 Wellbutrin XL 798 647 25 23 793 25 23 – – – 5 25 25 Imigran/Imitrex 711 697 3 2 551 11 9 118 (18 ) (18 ) 42 (12 ) (14 ) Lamictal 996 849 19 17 765 37 35 175 (22 ) (23 ) 56 2 2 Requip 268 156 74 72 176 >100 >100 81 21 19 11 25 38 Anti-virals 13 
2,349 2,299 5 2 1,159 4 (4 ) 726 5 14 464 7 3 14 2,827 2,598 10 9 1,354 7 5 855 11 11 618 16 14 HIV 1,508 1,465 6 3 798 2 (7 ) 555 11 20 155 12 6 1,515 1,554 (1 ) (3 ) 700 (7 ) (9 ) 621 3 2 194 8 7 Trizvir 376 315 22 19 219 20 10 143 28 39 14 27 17 Combivir 589 588 3 – 301 (3 ) (11 ) 218 8 17 70 16 9 528 583 (9 ) (9 ) 238 (14 ) (16 ) 217 (4 ) (4 ) 73 – – Trizivir 268 303 (11 ) (12 ) 141 (13 ) (15 ) 113 (7 ) (8 ) 14 (7 ) – Epivir 293 295 2 (1 ) 148 (1 ) (10 ) 107 5 14 38 6 3 202 261 (21 ) (23 ) 69 (25 ) (26 ) 90 (26 ) (26 ) 43 (2 ) (7 ) Retrovir 45 50 (10 ) (10 ) 19 (12 ) (17 ) 16 (14 ) (6 ) 10 1 – Ziagen 167 173 (1 ) (3 ) 86 (6 ) (15 ) 61 7 15 20 7 5 117 136 (13 ) (14 ) 48 (11 ) (13 ) 41 (24 ) (24 ) 28 4 4 Agenerase 31 44 (25 ) (30 ) 19 (33 ) (39 ) 9 (5 ) – 3 1 (25 ) Agenerase, Lexiva 131 112 18 17 74 7 6 48 40 37 9 14 29 Epzicom/Kivexa 241 118 >100 >100 125 49 47 97 >100 >100 19 >100 >100 Herpes 669 653 6 2 325 15 5 148 (3 ) 6 196 (2 ) (4 ) 965 826 19 17 610 30 28 144 4 4 211 3 – Valtrex 499 425 23 17 316 26 15 86 9 18 97 25 26 845 695 24 22 600 30 28 109 12 11 136 10 7 Zovirax 170 228 (26 ) (25 ) 9 (72 ) (74 ) 62 (16 ) (7 ) 99 (19 ) (22 ) 120 131 (6 ) (8 ) 10 67 67 35 (15 ) (15 ) 75 (7 ) (11 ) Zeffix 129 123 11 5 10 (4 ) (17 ) 17 2 6 102 14 7 162 145 12 12 13 8 8 23 10 10 126 13 13 Relenza 91 5 >100 >100 – – – 62 >100 >100 29 >100 >100 Metabolic 8 1,875 1,495 27 25 1,277 30 28 252 33 33 346 12 12 Avandia 1,399 1,154 23 21 1,068 26 24 125 13 12 206 13 16 Avandamet 204 175 17 17 86 (22 ) (24 ) 92 >100 >100 26 41 53 Avandaryl 42 – – – 40 – – – – – 2 – – Bonviva/Boniva 95 18 >100 >100 83 >100 >100 12 >100 >100 – – – Vaccines 8 1,692 1,389 23 22 465 40 38 709 20 20 518 13 13 Hepatitis 479 444 9 8 161 21 18 227 2 2 91 8 10 Infanrix, Pediarix 511 431 29 28 172 20 18 281 40 39 58 12 12 Boostrix 60 29 >100 >100 41 >100 >100 15 88 88 4 67 33 Cardiovascular and urogenital 7 1,636 1,331 24 23 1,072 42 40 395 (4 ) (5 ) 169 13 13 Coreg 779 573 38 36 773 38 36 – – – 6 20 20 Levitra 43 40 8 8 41 20 17 1 (75 ) (75 ) 1 – – Avodart 216 129 69 67 131 >100 >100 69 25 25 16 67 78 Arixtra 58 24 >100 >100 32 >100 >100 23 >100 >100 3 >100 >100 Fraxiparine 209 211 (1 ) (1 ) – – – 179 – – 30 (6 ) (6 ) Anti-bacterials 10 
1,815 2,210 (16 ) (18 ) 524 (41 ) (46 ) 755 1 8 536 6 (1 ) 8 1,369 1,519 (9 ) (10 ) 217 (15 ) (17 ) 628 (12 ) (13 ) 524 (2 ) (3 ) Augmentin 825 1,191 (29 ) (31 ) 312 (51 ) (56 ) 332 (2 ) 5 181 11 5 570 666 (14 ) (14 ) 94 (31 ) (32 ) 268 (15 ) (15 ) 208 – (1 ) Zinnat/Ceftin 246 243 – 1 22 (29 ) (35 ) 134 6 15 90 4 (2 ) 164 197 (16 ) (17 ) 12 20 20 82 (27 ) (27 ) 70 (5 ) (7 ) Fortum 184 201 (9 ) (8 ) 27 (22 ) (27 ) 95 (9 ) (1 ) 62 (3 ) (9 ) Amoxil 117 136 (11 ) (14 ) 19 (36 ) (41 ) 36 (26 ) (20 ) 62 15 5 Metabolic 6 
1,079 960 20 12 755 20 10 116 32 38 208 16 11 Avandia/Avandamet 931 809 24 15 755 20 10 70 57 67 106 40 34 Vaccines 6 
1,123 1,080 2 4 281 6 (3 ) 495 (1 ) 6 347 4 8 Hepatitis 417 483 (13 ) (14 ) 157 (18 ) (26 ) 192 (12 ) (6 ) 68 1 – Infanrix 336 254 32 32 124 71 57 147 17 26 65 10 12 Oncology and emesis 6 
1,001 977 9 2 743 10 – 163 1 7 95 13 12 5 1,069 1,016 7 5 836 12 10 153 (7 ) (7 ) 80 (11 ) (12 ) Zofran 774 708 16 9 575 20 10 126 1 8 73 13 11 847 837 3 1 679 8 6 107 (14 ) (14 ) 61 (16 ) (18 ) Hycamtin 110 94 23 17 77 33 22 25 – 4 8 14 14 113 99 15 14 72 11 9 34 26 26 7 17 17 Cardiovasular and 4 
urogenital 771 661 22 17 495 24 14 176 10 20 100 34 28 Coreg 361 306 28 18 346 28 17 – – – 15 33 36 Levitra 37 – – – 22 – – 11 – – 4 – – Avodart 19 6 >100 >100 14 >100 >100 5 – – – – – Other 6 
1,171 1,310 (8 ) (11 ) 99 (15 ) (22 ) 355 (16 ) (13 ) 717 (3 ) (8 ) 6 973 1,040 (5 ) (6 ) 83 19 19 263 (19 ) (18 ) 627 (1 ) (3 ) Zantac 328 382 (13 ) (14 ) 77 (1 ) (10 ) 94 (25 ) (19 ) 157 (10 ) (13 ) 232 244 (2 ) (5 ) 72 28 24 52 (19 ) (19 ) 108 (7 ) (11 ) 100 18,181 17,995 5 1 9,410 5 (4 ) 5,114 2 9 3,657 8 5 100 20,078 18,661 9 8 10,353 16 14 5,547 1 – 4,178 6 4 turnover growth at constant exchange rates. £% represents growth at actual exchange rates. GSK Annual Report 2007 55 82 GlaxoSmithKline REPORT OF THE DIRECTORSOperating and financialFinancial review and prospects2006Business review Financial review 2006 continued 2003 Year continuedUSAAnti-viralsThe USA reported five per cent turnoverTotal sales of HIV products were £1.5 billion, down 1%. Competition to older products,Combivir down 9% to £528 million andEpivirdown 21% to £202 million, was mostly offset by strong sales growth in the yearof new productsEpzicom/Kivexa which more than doubled to £241 million and this business represents 52 per cent of total pharmaceutical turnover.Lexiva/Agenerase up 18% to £131 million.Advair Valtrexmaintained its strong growth, rose 24% to £845 million, with US sales of £1,235up 30% to £600 million driving the overall respiratory growth of 21 per cent. However, this adversely affected sales of its constituent products, driven by patients switching to suppression therapy.
GSK launchedFlovent Avandiaand Serevent, which both showed declines. Flonase indicated for the treatment of perennial rhinitis grew strongly by 22 per cent.Sales growth of three per centtype 2 diabetes in the central nervous system products included sales of Wellbutrin up 18 per cent, reflecting the performance of the new once1999 and a day formulation combination product,Wellbutrin XL. Paxil sales declined nine per cent due to the launch of generic paroxetine in September 2003. GlaxoSmithKline's innovative new product Paxil CR, increased its share of total Paxil prescriptions (branded and generic) since the generic launch from 33 per cent to 37 per cent. Paxil CR sales in 2003 were £387 million.Sales in the anti-virals therapeutic area grew four per cent with HIV led by a strong performance of Trizivir up 20 per cent, which partially drew sales from its constituent products. ValtrexAvandamet, for herpes,blood sugar control in 2002. The product group was expanded further in February 2006 with the launch in the USA of a fixed-dose combination treatment,Avandaryl, which combinesAvandia with a sulfonylurea.26 per cent24% to £1.2 billion in the USA. In Europe, sales grew 39% to £217 million driven by the FDA approvalincreasing use ofAvandamet. Sales in International markets rose 17% to £234 million. TheAvandia product group achieved in 2006 a market share by value in oral anti-diabetics of 37% in the USA and 19% in Europe, up 2 and 5 percentage points, respectively. In the USA,Avandamet prescription volume growth was adversely impacted by product supply issues during the year which have now been resolved.reduced risktreatment of transmissionpostmenopausal osteoporosis, which was developed with Roche, and launched in 2005.
Overall vaccine sales increased 23% to £1.7 billion, with good performances from all regions: US sales rose 40% to £465 million; European sales grew 20% to £709 million and sales in International were up 13% to £518 million. Key contributors were:Infanrix/ Pediarix, GSK’s combination vaccines for children, with sales up 29% to £511 million; and sales of genital herpes.hepatitis vaccines, which grew 9% to £479 million, benefiting from a strong US performance ofHavrix, following approval last year for broader paediatric use.
Sales ofAvandia Zofranincreased grew 3% to £847 million, driven by 20 per cent, benefiting from the launch of US market, up 8% to £679 million. Europe and International sales declined 14% and 16% respectively due to generic competition. A generic competitor toAvandamet Zofran entered the US market in November 2002. 2006.
Sales ofCoreg, for heart disease, grew 38% to £779 million.Avodart, for benign prostatic hyperplasia (enlarged prostate), had a very strong year, with sales increasing 69% to £216 million.
Anti-bacterial sales declined 41 per cent as a result of9% reflecting generic competition that beganand a weaker ‘flu season.
Sales ofZantac fell 2% to £232 million, with declines in Europe and International partially offset by a 28% growth in the third quarter 2002. Coreg sales increased 28 per cent reflecting the benefit from recent data that showed a highly significant statistical difference in survival between Coreg and metopropol in patients with heart failure.USA.EuropeConsumer Healthcare salesThe discussionAn analysis of individual marketConsumer Healthcare sales is set out in the following table: 2006 2005 Growth £m £m CER% £% OTC medicines 1,496 1,437 5 4 Analgesics 380 362 7 5 Dermatological 165 161 4 2 Gastro-intestinal 252 249 2 1 Respiratory tract 172 154 12 12 Smoking control 353 336 7 5 Natural wellness support 132 133 – (1 ) Oral care 993 943 6 5 Nutritional healthcare 658 619 7 6 3,147 2,999 6 5 Europe region is on a ‘turnover created basis’ rather than a ‘turnover invoiced basis’; see pages 64 to 65 for further details.Europe region contributed 28 per cent of pharmaceutical turnover. Although overall turnover growth in the region was only two per cent, good growth was recorded in Italy and Central and Eastern Europe, but government healthcare reforms, including pricing and reimbursement restrictions, adversely affected turnover in France, Spain and Germany. Seretide, GlaxoSmithKline’s largest selling product in Europe, reported notable growth in France, Italy and the UK, although this was partly offset by expected declines in Serevent and Flixotide. Trizivir showed strong growth in all of the major markets in the region. The decline infourth quarter, with sales of the herpes franchise was mainly as a result of generic competition for Zovirax partially offset by patients switching to the newer Valtrex product.InternationalAn eight per cent turnover growth in the International region reflected a mixture of good growth in the Middle East and Africa, Canada, Japan and Asia Pacific. Latin America also grew strongly as Mexico rebounded following poor economic conditions and a re-alignment of wholesaler stock levels in 2002.Overall International growth was driven by Seretide, Seroxat/Paxil and Avandia, partly offset by declines in Zantac and Zoviraxup 7%.The Asia Pacific area grew due to the performance of Seretide and Avandia. Strong growth in a number of markets was partly offset by a decline of one per cent in the largest market, Australia, reflecting reduced sales of Zyban, Zantac and the older antibiotics.The growth in Japan reflected strong growth of Paxil, Serevent and Valtrex partly offset by the declines of Zovirax, Zantac, and government price reductions.The Middle East and Africa area followed the trends of most other markets with growth in Seretide, Avandia, and vaccines. In Canada growth was driven by Seretide and Avandia.Consumer Healthcare sales Growth 2003 2002 £m £m CER% £% OTC medicines 1,556 1,586 2 (2 ) Analgesics 342 339 4 1 Dermatological 237 188 31 26 Gastro-intestinal 283 312 (2 ) (9 ) Respiratory tract 151 142 6 6 Smoking control 325 378 (8 ) (14 ) Natural wellness support 166 162 3 2 Oral care 1,082 1,052 3 3 Nutritional healthcare 622 579 9 7 3,260 3,217 4 1 The growth in Consumer Healthcare sales of four per cent to £3,260 million comprised an OTC medicines sales increase of two per cent, a Nutritional Healthcare sales increase of nine per cent and Oral care sales increase of three per cent.
Over-the-counter medicine sales were £1.6grew 5% to £1.5 billion up two per cent. Sales ofwithPanadol and smoking control and gastro-intestinal products were down significantly in the USA primarily due to flat market conditions and to private label competition. Growth from smoking control products recently launched in Europe and sales of dermatological products acquired earlier this year helped to offset these declines.performing well.
Oral care sales grew 6% to £993 million.Sensodyne grew strongly, up 19% for the year to £257 million. Sales ofAquafreshwere £1.1 billion, up three per cent.GlaxoSmithKline's Sensodyne brand continuesdown 3% to grow in all regions.£283 million.
Nutritional healthcare products sales grew nine per cent7% to £0.6 billion. Lucozade Sport and £658 million.Lucozade Hydroactive continued, grew 14% to drive growth in this category.£301 million, andHorlicks, grew 6% to £156 million.Ribena sales were down 1% to £169 million.56 GSK Annual Report 2007 Operating and financialREPORT OF THE DIRECTORSFinancial review and prospects GlaxoSmithKline2006Business review 83Financial review 2006continued TradingOperating profit – statutory
The analysis below of operating profit and subsequent discussion compares the 2006 results with 2005 results.Statutory results include merger items, integration and restructuring costs, and the disposal of subsidiaries. 2003
(restated) 2002
(restated) Growth £m % £m % CER% £% Turnover 21,441 100.0 21,212 100.0 5 1 Cost of sales (4,544 ) (21.2 ) (4,609 ) (21.7 ) – (1 ) Selling, general and administration (7,597 ) (35.4 ) (8,023 ) (37.8 ) (2 ) (5 ) Research and development (2,791 ) (13.0 ) (2,900 ) (13.7 ) (1 ) (4 ) Trading profit 6,509 30.4 5,680 26.8 21 15 2006 2005 Growth £m % £m % CER% £% Turnover 23,225 100.0 21,660 100.0 9 7 Cost of sales (5,010 ) (21.6 ) (4,764 ) (22.0 ) 6 5 Selling, general and administration (7,257 ) (31.2 ) (7,250 ) (33.5 ) – – Research and development(3,457 ) (14.9 ) (3,136 ) (14.5 ) 11 10 Other operating income 307 1.3 364 1.7 Operating profit 7,808 33.6 6,874 31.7 17 14
Cost of sales reduceddeclined as a percentage of turnover as a result of benefits arising from mergerby 0.4 percentage points. At constant exchange rates the decline was 0.6 percentage points reflecting favourable price and manufacturing restructuring savings and a favourable product mix. A small pricing benefit was more than offset by an adverse exchangeregional mix impact. Merger and manufacturing costs incurred of £356 million were £10 million lower than in 2002.
Selling, general and administration (SG&A) costs declined two per cent reflecting reduced merger integration costs and operational excellence cost savings initiatives. These were partly offset by increased selling costs to support new product launches, charges relating to cost saving programmes and increased pension costs. Without the merger integration costs SG&A grew four per cent driven by selling cost increases, which accounted for a three percentage point increase. The charges relating to operational excellence and pension cost increases each individually added one percentage point, while cost savings reduced growth by one percentage point. Together these produced a reduction of 2.4 percentage points relative to 2002 for the expenses expressed as a percentage of turnover.turnover reduced 2.3 percentage points. At constant exchange rates, the decrease was 2.5 percentage points, reflecting flat expenditure compared with prior year on a turnover growth of 9%. SG&A costs were flat due to higher advertising, promotion and selling expenditure offset by lower general and administration expenditure. Advertising, promotion and selling increased 3% and accounted for a 2% increase in total SG&A. General and administration expenditure declined 5% and accounted for a 2% decline in total SG&A, of which one percentage point was due to lower charges related to legal matters and one percentage point was due to lower costs related to programmes to deliver future cost savings.
R&D declined one per cent reflecting reduced merger integrationexpenditure increased 11% partly as a result of higher charges related to restructuring programmes. Excluding restructuring costs partly offset by increased clinical trial and in-licensing activity and the reinvestment of merger synergies.R&D grew 8%, broadly in-line with turnover. Pharmaceuticals R&D expenditure, excluding restructuring costs, represented 14.9 per cent16.2% (2005 – 16.2%) of pharmaceutical turnover in the year.turnover.Trading profitOther operating incomeStatutory trading profitOther operating income includes royalty income, equity investment disposals and impairments, product disposals and fair value adjustments to the Quest collar and Theravance options. Other operating income was £6,509£307 million in 2006 compared with a growth of 21 per cent, stronger than turnover growth of five per cent, demonstrating an improved trading margin of 3.6 percentage points. This was principally£364 million in 2005. The decrease is primarily due to lower merger integration costs, cost savings derived from merger integration, manufacturingproduct and other initiatives partlyasset disposal profits partially offset by charges relatingthe favourable fair value movement to operational excellence cost saving programmesthe Quest collar and higher pension costs.Theravance options.Profit before taxation - statutory resultsOperating profitThe analysis
Overall, the operating profit margin increased 1.9 percentage points as operating profit increased 14% in sterling terms to £7,808 million. Operating profit increased 17% at constant exchange rates and discussionthe margin increased 2.4 percentage points, reflecting SG&A growth below the rate of profit before taxation relates to statutory performance.Other operating income/(expense) 2003
£m 2002
£m Royalties and other income 75 75 Other operating expense (436 ) (209 ) (361 ) (134 ) Income from equity investments and other disposals 228 23 (133 ) (111 ) Other operating income/(expense) includes litigation costs and provisions relating to legal claims on withdrawn products, product withdrawals and anti-trust matters, equity investment carrying value adjustments arising from stock market price changes, royalty income, product disposals and equity investment sales.Other operating expenses were £133 million in the year compared with £111 million in 2002. The year on year movement reflects higher provisions in 2003 for product liability, anti-trust and other claims,turnover growth, partially offset by higher 2003 proceedscosts related to programmes to deliver future cost savings and lower other operating income.productasset disposals were £169 million (2005 – £290 million), costs for legal matters were £333 million (2005 – £430 million), the fair value movements on the Quest collar and equity investment sales.Theravance options resulted in an income of £29 million (2005 – £19 million) and charges relating to cost-saving programmes were £205 million (2005 – £141 million). The total operating profit impact of these items was a £340 million charge in 2006, compared with a £262 million charge in 2005.Business disposalsProfit before taxation
The profitdiscussion below compares the 2006 results with the 2005 results. 2006 2005 Finance income £m £m Interest and other finance income 285 276 Fair value adjustments and hedges 2 (19 ) 287 257 Finance costs Interest costs (314 ) (427 ) Unwinding of discount on liabilities (36 ) (25 ) Fair value adjustments and hedges (2 ) 1 (352 ) (451 ) disposalextended credit on receivables and increased interest income due to higher US dollar interest rates. Finance costs reduced due to the refinancing of businessestwo expensive bonds in 2003 of £5 million reflects the final settlements regarding the disposal of Healthcare Services businesses in 1999.December 2005 and January 2006 as well as lower swap costs resulting from reduced interest rate differentials.profits/(losses)after tax profits of associates and joint ventures and associated undertakings
The share of profits of associates arises principally from the Group’s holding in Quest Diagnostics Inc.Net interest payable 2003
£m 2002
£m Interest payable (214 ) (206 ) Investment income 61 73 (153 ) (133 ) Share of interest payable of associate (8 ) (8 ) (161 ) (141 ) Net interest payable increased compared with 2002 largely as a result of the unwinding of the discounts on provisions and long-term receivables.Profit on ordinary activities before taxation - statutory resultsTaking account of net other operating income/(expenses), the contribution from associates, business disposals and net interest payable, statutory profit before tax was £6,313 million compared with £5,524 million in 2002, an increase of 20 per cent. GSK Annual Report 2007 57 84GlaxoSmithKline Operating and financial review and prospects2003 Year continuedTrading profit – business performanceTo illustrate GlaxoSmithKline performance in 2003, the analysis below of trading profit and the subsequent discussion excludes merger items, integration and restructuring costs and the disposal of businesses. Management believes that exclusion of these items provides a better reflection of the way in which the business is managed. Accordingly this information is provided as a supplement to that contained in the consolidated statement of profit and loss on pages 90 and 91 prepared in accordance with UK GAAP. 2003
(restated) 2002
(restated) Growth
£m % £m % CER% £% Turnover 21,441 100.0 21,212 100.0 5 1 Cost of sales (4,188 ) (19.5 ) (4,243 ) (20.0 ) – (1 ) Selling, general and administration (7,579 ) (35.4 ) (7,525 ) (35.5 ) 4 1 Research and development (2,770 ) (12.9 ) (2,732 ) (12.9 ) 4 1 Trading profit 6,904 32.2 6,712 31.6 8 3 Cost of salesCost of sales reduced as a percentage of turnover as a result of benefits arising from merger, manufacturing restructuring savings, and a favourable product mix. A small pricing benefit was more than offset by an adverse exchange impact.Selling, general and administrationSelling, general and administration (SG&A) costs grew four per cent reflecting increased selling costs to support new product launches, charges relating to operational excellence cost saving programmes and increased pension costs, partly offset by cost saving initiatives. These cost saving initiatives were relatively small restructuring activities in 2002 and 2003. It is estimated that without the operational excellence charges SG&A would have grown three per cent, driven principally by selling cost increases. Pension cost increases added one percentage point, but these were offset by cost saving initiatives. Together these produced a reduction of 0.2 percentage points expressed as a percentage of turnover.Research and developmentResearch and development (R&D) increased four per cent reflecting increased clinical trial and in-licensing activity and the reinvestment of merger synergies. Pharmaceuticals R&D expenditure represented 14.8 per cent of pharmaceutical turnover in the year.Trading profitBusiness performance trading profit was £6,904 million with a growth of eight per cent, stronger than turnover growth of five per cent, demonstrating an improved trading margin of 0.8 points to 32.2 per cent compared with 2002. This was principally due to cost savings derived from merger integration, manufacturing and other initiatives, partly offset by charges relating to operational excellence cost saving programmes and higher pension costs.The focus of operational excellence is on value creation and the elimination of waste and bureaucracy. This programme has become an integral part of the way the business is managed and so any charges are booked to business performance.Profit before taxation - business performanceThe analysis and discussion below of profit before taxation relates to business performance. 2003 2002 Other operating income/(expense) £m £m Royalties and other income 75 75 Other operating expense (436 ) (209 ) (361 ) (134 ) Income from equity investments and other disposals 228 23 (133 ) (111 ) Other operating income/(expense) includes litigation costs and provisions relating to legal claims on withdrawn products, product withdrawals and anti-trust matters, equity investment carrying value adjustments arising from stock market price changes, royalty income, product disposals and equity investment sales.Other operating expenses were £133 million in the year compared with £111 million in 2002. The year-on-year movement reflects higher provisions in 2003 for product liability, anti-trust and other claims, partially offset by higher 2003 proceeds from product disposals and equity investment sales.Share of profits/(losses) of joint ventures and associated undertakingsThe share of profits of associates arises principally from the Group’s holding in Quest Diagnostics Inc. 2003 2002 Net interest payable £m £m Interest payable (214 ) (206 ) Investment income 61 73 (153 ) (133 ) Share of interest payable of associate (8 ) (8 ) (161 ) (141 ) Net interest payable increased compared with 2002 largely as a result of the unwinding of the discounts on provisions and long-term receivables.Profit on ordinary activities before taxation - business performanceTaking account of net other operating income/(expense), the contribution from associates, business disposals and net interest payable, business performance profit before tax was £6,703 million, compared with £6,535 million in 2002, an increase of eight per cent.Operating and financial review and prospects GlaxoSmithKline85Merger items, restructuring costs and disposal of businessesMerger and manufacturing restructuringGlaxoSmithKline has made good progress with its merger and manufacturing restructuring plans. The merger programmes were substantially complete at the end of 2003. Combined these programmes have now produced annual savings which exceeded the published target of £1.8 billion.Costs of £369 million were incurred in the year in respect of merger and manufacturing restructuring. After tax relief of £91 million, the net charge was £278 million. The costs in 2003 include severance, asset write-downs, professional fees and site closure.Block Drug Company, Inc.GlaxoSmithKline acquired Block Drug in January 2001. The costs incurred in integrating this business were £26 million in 2003 including redundancies, asset write-downs and site closures.Disposal of businessesThe profit on disposal of businesses in 2003 of £5 million reflects the final settlements regarding the disposal of the Healthcare Services businesses in 1999.Taxation 2003
(restated)
£m 2002
(restated)
£m Business performance (1,838 ) (1,763 ) Merger, restructuring and disposal of subsidiaries 109 299 Total (1,729 ) (1,464 ) The integrated nature of the Group’s worldwide operations, involving significant investment in research and strategic manufacture at a limited number of locations, with consequential cross-border supply routes into numerous end-markets, gives rise to complexity and delay in negotiations with revenue authorities as to the profits on which individual Group companies are liable to tax. Disagreements with, and between, revenue authorities as to intra-Group transactions, in particular the price at which goods should be transferred between Group companies in different tax jurisdictions, can produce conflicting claims from revenue authorities as to the profits that fall to be taxed in individual territories. Resolution of such issues is a continuing fact of life for GlaxoSmithKline. The Group has open issues with the revenue authorities in the USA, UK, Japan and Canada, but by far the largest relates to Glaxo heritage products in the USA.In the USA, for a number of years, GlaxoSmithKline has had significant open issues relating to transfer pricing. GlaxoSmithKline has attempted to settle the dispute, first through direct discussion with the US Internal Revenue Service (IRS) and subsequently through discussions between the USA and UK authorities under the terms of the double tax convention between the two countries. GlaxoSmithKline understands that the views of the two tax authorities were so different that they were unable to reach agreement, and discussions were terminated in July 2003.The Group has now received a claim for additional taxes that the IRS asserts legacy company Glaxo Wellcome owes for the years 1989 to 1996. This statutory notice of deficiency for $2.7 billion (£1.5 billion) in tax principally relates to the allocation of profits for Glaxo heritage products between the USA and other countries. To the extent that the IRS were successful in its claim, interest would be payable. GlaxoSmithKline estimates the interest on the full claim to date would be approximately $2.5 billion (£1.4 billion), net of federal tax relief. As similar tax issues remain open for 1997 to date, GlaxoSmithKline expects to receive further claims by the IRS for these years.Since GlaxoSmithKline has exhausted all administrative remedies open to it, the Group plans to contest this claim for additional taxes by filing a petition in the US Tax Court, where a trial is not expected until sometime in 2005 or 2006.GlaxoSmithKline continues to believe that the profits reported by the US subsidiaries for the period 1989 to date, on which it has paid taxes in the USA, are more than sufficient to reflect the activities of its US operations.GlaxoSmithKline uses the best advice in determining its transfer pricing methodology and in seeking to manage transfer pricing issues to a satisfactory conclusion and, on the basis of external professional advice, continues to believe that it has made adequate provision for the liabilities likely to arise from open assessments. However, there continues to be a wide difference of views between the Group and the IRS. The ultimate liability for such matters may vary significantly from amounts provided and is dependent upon the outcome of litigation proceedings and negotiations with the relevant tax authorities.The credit for taxation on merger and restructuring items amounting to £109 million reflects the actual tax rate applicable to the transactions in the territories in which they arise.For the latest position on taxation, see ‘Taxation’ in the 2004 Year Operating and financial review and prospects on page 68.86GlaxoSmithKline Operating and financial review and prospects2003 Year continuedEarnings 2003 2002 Growth (restated) (restated) CER% £% Statutory earnings (£m) 4,478 3,930 19 14 Basic earnings per share 77.1 p 66.5 p 22 16 Basic earnings per ADS $2.53 $2.00 23 27 Adjusted earnings (£m) 4,759 4,642 7 5 Adjusted earnings per share 82.0 p 78.5 p 10 4 Adjusted earnings per ADS $2.69 $2.36 10 14 Weighted average number of shares (millions) 5,806 5,912 Adjusted earnings and adjusted earnings per share are presented above in order to illustrate business performance which is the primary measure used by management. Adjusted earnings increased by seven per cent. Adjusted earnings per share increased by 10 per cent reflecting the reduction in the weighted average number of shares resulting from the Group’s share buy-back programme. The interest cost of this programme also impacts the Group’s earnings.Adjusted earnings per share increased four per cent in sterling terms, compared with 10 per cent in CER terms. The adverse currency impact on EPS of six per cent in the year reflected the significant weakening of the US dollar relative to 2002 and compares with a four per cent adverse currency impact on turnover. This difference principally arises from a different mix of currencies in profits compared with turnover.Taken together with other expenses, taxation and business disposals this resulted in a basic EPS of 77.1 pence compared with 66.5 pence in 2002 and a diluted EPS of 76.9 pence compared with 66.3 pence in 2002. Merger and manufacturing restructuring costs were lower in 2003 than in 2002 and as a result, the sterling based growth in basic EPS of 16 per cent was significantly higher than the CER based growth in adjusted EPS despite the overall negative impact of currencies in 2003.DividendThe Board has declared a fourth interim dividend of 14 pence per share making a total for the year of 41 pence per share. This compares with a total dividend of 40 pence per share for 2002.In 2004, GlaxoSmithKline expects a similar increase in the total dividend as has been declared in 2003. The allocation of the quarterly dividends will be rebalanced in 2004. GlaxoSmithKline intends to increase the first three interim dividends from nine pence to 10 pence, with the remainder of the total dividend for the year being allocated to the fourth quarter dividend.GlaxoSmithKline 87Financial statementsThis section comprises the Directors’ statements of responsibility, the Independent Auditors’ report on the Financial statements, the Financial statements consisting of the principal Financial statements and supporting notes.88Directors’ statements of responsibility89Report on Independent Registered Public Accounting Firm Financial statementsREPORT OF THE DIRECTORS90Consolidated statement of profit and loss90Consolidated statement of total recognised gains and losses92Consolidated statement of cash flow94Consolidated balance sheet94Reconciliation of movements in consolidated equity shareholders’funds95Company balance sheet Notes to the financial statementsFinancial review 2006961. Presentation of the Financial statements972. Accounting policies993. New accounting policies and future requirements994. Exchange rates1005. Merger of Glaxo Wellcome and SmithKline Beecham1006. Segment information1027. Merger items, restructuring costs and divested businesses1038. Other operating income/(expense)1049. Operating profit10410. Joint ventures and associated undertakings10511. Net interest payable10512. Taxation10713. Earnings per share10714. Dividends10815. Goodwill10816. Other intangible assets10917. Tangible fixed assets10918. Fixed asset investments11019. Equity investments11020. Stocks11021. Debtors11022. Other creditors11123. Provisions for liabilities and charges11124. Contingent liabilities11225. Net debt11326. Commitments11427. Share capital and share premium account11428. Non-equity minority interests11529. Reserves11630. Legal proceedings12231. Post balance sheet event12232. Related party transactions12333. Acquisitions and disposals12534. Financial instruments and related disclosures12935. Employee costs13636. Employee share schemes13937. Reconciliation to US accounting principles15038. Principal Group companies88GlaxoSmithKlineDirectors’ statements of responsibilityDirectors’ statement of responsibility in relation to the Financial statementsThe Directors are:•responsible for ensuring the maintenance of proper accounting records, which disclose with reasonable accuracy the financial position of the Group at any time and from which financial statements can be prepared to comply with the Companies Act 1985•required by law to prepare financial statements for each financial period which give a true and fair view of the state of affairs of the company and the Group as at the end of the financial period and of the profit or loss for that period•responsible also for ensuring the operation of systems of internal control and for taking reasonable steps to safeguard the assets of the Group and for preventing and detecting fraud and other irregularities.The Financial statements for the year ended 31st December 2004, comprising principal statements and supporting notes, are set out in ‘Financial statements’ on pages 90 to 152 of this report.The Directors confirm that suitable accounting policies have been consistently applied in the preparation of the Financial statements, supported by reasonable and prudent judgements and estimates as necessary; applicable accounting standards have been followed, and the Financial statements have been prepared on the going concern basis.The responsibilities of the auditors in relation to the Financial statements are set out in the Independent Auditors’ report (page 89 opposite).The Financial statements for the year ended 31st December 2004 are included in the Annual Report 2004, which is published in hard-copy printed form and made available on the website. The Directors are responsible for the maintenance and integrity of the Annual Report on the website in accordance with UK legislation governing the preparation and dissemination of financial statements. Access to the website is available from outside the UK, where comparable legislation may be different.Directors’ remunerationThe Remuneration Report (pages 43 to 58 of this report) sets out the remuneration policies operated by GlaxoSmithKline and disclosures on Directors’ remuneration and other disclosable information relating to Directors and officers and their interests. It has been prepared in accordance with the Companies Act 1985 and complies with Section B of the Combined Code on Corporate Governance.Going concern basisAfter making enquiries, the Directors have a reasonable expectation that the Group and company have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the Financial statements.Internal controlThe Board, through the Audit Committee, has reviewed the assessment of risks and the internal control framework that operates in GlaxoSmithKline and has considered the effectiveness of the system of internal control in operation in the Group for the year covered by this report and up to the date of its approval by the Board of Directors.The Combined CodeThe Board considers that GlaxoSmithKline plc applies the principles of the Combined Code on Corporate Governance of the Financial Reporting Council, as described under ‘Corporate governance’ (pages 33 to 42), and has complied with its provisions except as described on page 41.As required by the Listing Rules of the Financial Services Authority, the auditors have considered the Directors’ statement of compliance in relation to those points of the Combined Code which are specified for their review.Annual ReportThe Annual Report for the year ended 31st December 2004, comprising the Report of the Directors, the Remuneration Report, the Financial statements and additional information for investors, has been approved by the Board of Directors and signed on its behalf bySir Christopher GentChairman2nd March 2005GlaxoSmithKline89Report of Independent Registered Public Accounting FirmTo Board of Directors and Shareholders of GlaxoSmithKline plc:In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of profit and loss, of total recognised gains and losses and of cash flows present fairly, in all material respects, the financial position of GlaxoSmithKline plc and its subsidiaries at 31st December 2004 and 31st December 2003, and the results of their operations and their cash flows for each of the three years in the period ended 31st December 2004 in conformity with accounting principles generally accepted in the United Kingdom. These financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.As discussed in Note 3 to the consolidated financial statements, the Group changed its method of accounting for employee share schemes and ESOP Trusts in conformity with Urgent Issues Task Force Abstract 17 (revised 2003), ‘Employee Share Schemes’ and Urgent Issues Task Force Abstract 38, ‘Accounting for ESOP Trusts’, which were adopted as at 1st January 2002.Accounting principles generally accepted in the United Kingdom vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 37 to the consolidated financial statements.PricewaterhouseCoopers LLPLondon, England2 March 2005, except for the Cidra, Puerto Rico manufacturing site matter discussed in Note 30, for which the date is 8 March 2005.90GlaxoSmithKlineConsolidated statement of profit and loss for the year ended 31st December 2004 2004 Statutory Notes £m Turnover 6 20,359 Cost of sales (4,309 ) Gross profit 16,050 Selling, general and administrative expenditure (7,061 ) Research and development expenditure (2,839 ) Trading profit 6,150 Other operating income/(expense) 8 (60 ) Operating profit 9 6,090 Share of profits/(losses) of joint ventures and associated undertakings 10 95 Profit on disposal of interest in associates 33 138 Product divestments 7 – (Loss)/profit on disposal of businesses (1 ) Profit before interest 6,322 Net interest payable 11 (203 ) Profit on ordinary activities before taxation 6,119 Taxation 7,12 (1,701 ) Profit on ordinary activities after taxation 4,418 Equity minority interests (114 ) Preference share dividends (2 ) Earnings (Profit attributable to shareholders) 13 4,302 Basic earnings per share 13 75.0 p Adjusted earnings per share 13 75.0 p Diluted earnings per share 13 74.8 p Profit attributable to shareholders 4,302 Dividends 14 (2,402 ) Retained profit 1,900 Consolidated statement of total recognised gains and lossesfor the year ended 31st December 20042004£mProfit attributable to shareholders4,302Exchange movements on overseas net assets(54)Unrealised (loss)/profit on disposal of intellectual property(1)Tax on exchange movements and unrealised gains(73)Total recognised gains and losses relating to the year4,174Prior year adjustment – implementation of UITF 17 (revised) and UITF 38368Total recognised gains and losses4,542Consolidated statement of profit and loss GlaxoSmithKline91 Business review Financial review 2006 continued 2003 2002 Merger, Merger, Business restructuring Business restructuring performance and disposal Statutory performance and disposal Statutory (restated) of subsidiaries (restated) (restated) of subsidiaries (restated) £m £m £m £m £m £m 21,441 – 21,441 21,212 – 21,212 (4,188 ) (356 ) (4,544 ) (4,243 ) (366 ) (4,609 ) 17,253 (356 ) 16,897 16,969 (366 ) 16,603 (7,579 ) (18 ) (7,597 ) (7,525 ) (498 ) (8,023 ) (2,770 ) (21 ) (2,791 ) (2,732 ) (168 ) (2,900 ) 6,904 (395 ) 6,509 6,712 (1,032 ) 5,680 (133 ) – (133 ) (111 ) – (111 ) 6,771 (395 ) 6,376 6,601 (1,032 ) 5,569 93 – 93 75 – 75 – – – – – – – – – – 11 11 – 5 5 – 10 10 6,864 (390 ) 6,474 6,676 (1,011 ) 5,665 (161 ) – (161 ) (141 ) – (141 ) 6,703 (390 ) 6,313 6,535 (1,011 ) 5,524 (1,838 ) 109 (1,729 ) (1,763 ) 299 (1,464 ) 4,865 (281 ) 4,584 4,772 (712 ) 4,060 (94 ) – (94 ) (110 ) – (110 ) (12 ) – (12 ) (20 ) – (20 ) 4,759 (281 ) 4,478 4,642 (712 ) 3,930 – 77.1 p – 66.5 p 82.0 p – 78.6 p – – 76.9 p – 66.3 p 4,478 3,930 (2,374 ) (2,346 ) 2,104 1,584 2003 2002 (restated) (restated) £m £m 4,478 3,930 113 (82 ) 7 7 (92 ) (65 ) 4,506 3,790 92GlaxoSmithKlineConsolidated statement of cash flow for the year ended 31st December 2004 Reconciliation of operating profit to operating cash flows 2003 2002 2004 (restated) (restated) Notes £m £m £m Operating profit 6,090 6,376 5,569 Depreciation 785 773 764 Impairment and assets written off 88 250 288 Amortisation of goodwill and intangible fixed assets 106 87 72 Loss on sale of tangible fixed assets 2 – 26 Profit on sale of equity investments (33 ) (89 ) (46 ) Increase in stocks (33 ) (76 ) (2 ) Increase in trade and other debtors (447 ) (552 ) (72 ) Increase/(decrease) in trade and other creditors 163 (69 ) 459 (Decrease)/increase in provisions (176 ) 260 256 Other (18 ) 45 (59 ) Net cash inflow from operating activities 6,527 7,005 7,255 Cash flow statement Net cash inflow from operating activities 6,527 7,005 7,255 Dividends from joint ventures and associated undertakings 11 1 2 Returns on investment and servicing of finance (252 ) (231 ) (237 ) Taxation paid (1,583 ) (1,917 ) (1,633 ) Capital expenditure and financial investment (1,035 ) (954 ) (1,178 ) Acquisitions and disposals 33 (69 ) (12 ) (20 ) Equity dividends paid (2,475 ) (2,333 ) (2,327 ) Net cash inflow before management of liquid resources and financing 1,124 1,559 1,862 Management of liquid resources (413 ) (1,336 ) 52 Financing (454 ) (250 ) (1,509 ) Increase/(decrease) in cash in the year 257 (27 ) 405 Reconciliation of net cash flow to movement in net debt Net debt at beginning of year (1,648 ) (2,335 ) (2,101 ) Increase/(decrease) in cash in the year 257 (27 ) 405 Cash outflow/(inflow) from management of liquid resources 413 1,336 (52 ) Net increase in long-term loans (1,350 ) (1,023 ) (1,005 ) Net repayment of short-term loans 407 442 542 Net repayment of obligations under finance leases 22 – 1 Net non-cash funds of subsidiary undertakings acquired – – (4 ) Exchange adjustments 24 (37 ) (121 ) Other non-cash movements (109 ) (4 ) – Movement in net debt (336 ) 687 (234 Net debt at end of year 25 (1,984 ) (1,648 ) (2,335 ) Consolidated statement of cash flow GlaxoSmithKline93Analysis of cash flows 2003 2002 2004 (restated) (restated) Notes £m £m £m Returns on investment and servicing of finance Interest received 95 65 83 Interest paid (272 ) (197 ) (215 ) Dividends paid to minority shareholders (73 ) (84 ) (85 ) Dividends paid on preference shares (2 ) (15 ) (20 ) (252 ) (231 ) (237 ) Capital expenditure and financial investment Purchase of tangible fixed assets (865 ) (869 ) (1,044 ) Sale of tangible fixed assets 53 46 59 Purchase of intangible assets (178 ) (193 ) (182 ) Product divestments – – (1 ) Purchase of equity investments (103 ) (63 ) (75 ) Sale of equity investments 58 125 65 (1,035 ) (954 ) (1,178 ) Acquisitions and disposals 33 Purchase of businesses (297 ) (12 ) (21 ) Disposal of businesses 42 3 6 Investment in joint ventures and associated undertakings (2 ) (3 ) (5 ) Disposal of interests in associates 188 – – (69 ) (12 ) (20 ) Financing Issue of share capital 27 42 41 56 Redemption of preference shares issued by a subsidiary (489 ) – – Share capital purchased for cancellation (201 ) (980 ) (2,220 ) Share capital purchased and held as Treasury shares (799 ) – – Proceeds from own shares for employee share options 23 26 58 Other financing cash flows 49 82 135 Increase in long-term loans 1,365 1,046 1,094 Repayment of long-term loans (15 ) (23 ) (89 ) Net repayment of short-term loans (407 ) (442 ) (542 ) Net repayment of obligations under finance leases (22 ) – (1 ) (454 ) (250 ) (1,509 ) Analysis of changes in net debt At 1.1.04 Exchange Other Cash flow At 31.12.04 £m £m £m £m £m Cash at bank 962 (21 ) – 220 1,161 Overdrafts (155 ) 6 – 37 (112 ) 807 (15 ) – 257 1,049 Debt due within one year: Commercial paper (836 ) – (1 ) 7 (830 ) Eurobonds and Medium-Term Notes (383 ) 9 (552 ) 374 (552 ) Other (78 ) (3 ) (42 ) 35 (88 ) (1,297 ) 6 (595 ) 416 (1,470 ) Debt due after one year: Eurobonds, Medium-Term Notes and private financing (3,617 ) 116 548 (1,349 ) (4,302 ) Other (34 ) 5 (62 ) 12 (79 ) (3,651 ) 121 486 (1,337 ) (4,381 ) Management of liquid resources: Liquid investments 2,493 (88 ) – 413 2,818 Net debt (1,648 ) 24 (109 ) (251 ) (1,984 ) For further information on significant changes in net debt see Note 25 ‘Net debt’.94GlaxoSmithKlineConsolidated balance sheet at 31st December 2004 2003 2004 (restated) Notes £m £m Goodwill 15 139 143 Other intangible assets 16 2,003 1,697 2,142 1,840 Tangible assets 17 6,471 6,441 Investments 18 332 294 Fixed assets 8,945 8,575 Equity investments 19 153 164 Stocks 20 2,192 2,109 Debtors 21 7,309 6,897 Liquid investments 25 2,818 2,493 Cash at bank 25 1,161 962 Current assets 13,633 12,625 Loans and overdrafts 25 (1,582 ) (1,452 ) Other creditors 22 (7,140 ) (7,019 ) Creditors: amounts due within one year (8,722 ) (8,471 ) Net current assets 4,911 4,154 Total assets less current liabilities 13,856 12,729 Loans 25 (4,381 ) (3,651 ) Other creditors 22 (244 ) (232 ) Creditors: amounts due after one year (4,625 ) (3,883 ) Provisions for liabilities and charges 23 (3,029 ) (3,042 ) Net assets 6,202 5,804 Capital and reserves Called up share capital 27 1,484 1,487 Share premium account 27 304 264 Other reserves 29 (644 ) (804 ) Profit and loss account 29 4,781 4,112 Equity shareholders’ funds 5,925 5,059 Non-equity minority interests 28 – 503 Equity minority interests 277 242 Capital employed 6,202 5,804 Approved by the Board on 2nd March 2005Sir Christopher Gent, Chairman
TaxationReconciliation of movements in consolidated equity shareholders’ fundsfor the year ended 31st December 2004 2003 2004 (restated) Notes £m £m Equity shareholders’ funds as previously reported 7,720 6,581 Prior period adjustment – implementation of UITF 17 (revised) and UITF 38 (2,661 ) (2,741 ) Equity shareholders’ funds at beginning of year as restated 5,059 3,840 Total recognised gains and losses for the period 4,174 4,506 Dividends 14 (2,402 ) (2,374 ) Ordinary shares issued 42 41 Ordinary shares purchased and cancelled (201 ) (980 ) Ordinary shares purchased and held as Treasury shares (799 ) – Proceeds from own shares for employee share options 23 26 Employee share schemes 3 7 Goodwill written back 20 – Exchange movements on goodwill written off to reserves 6 (7 ) Equity shareholders’ funds at end of year 5,925 5,059 GlaxoSmithKline95Company balance sheet at 31st December 2004 2004 2003 Notes £m £m Shares in subsidiary companies – at cost 38 17,930 17,612 Fixed assets 17,930 17,612 Amounts owed by Group undertakings 108 2,969 Taxation 110 52 Cash at bank 22 8 Current assets 240 3,029 Dividends payable 14 (1,258 ) (1,331 ) Amounts owed to Group undertakings (6,821 ) (8,578 ) Creditors: amounts due within one year (8,079 ) (9,909 ) Net current liabilities (7,839 ) (6,880 ) Net assets 10,091 10,732 Capital and reserves Called up share capital 27 1,484 1,487 Share premium account 27 304 264 Other reserves 29 81 76 Profit and loss account 29 8,222 8,905 Equity shareholders’ funds 10,091 10,732 Approved by the Board on 2nd March 2005Sir Christopher GentChairman96GlaxoSmithKlineNotes to the financial statements1Presentation of the Financial statementsDescription of businessGlaxoSmithKline is a major global healthcare group which is engaged in the creation and discovery, development, manufacture and marketing of pharmaceutical products, including vaccines, over-the-counter (OTC) medicines and health-related consumer products. GlaxoSmithKline’s principal pharmaceutical products include medicines in the following therapeutic areas: central nervous system, respiratory, anti-virals, anti-bacterials, vaccines, oncology and emesis, metabolic, cardiovascular and urogenital.Financial periodThese Financial statements cover the financial year from 1st January to 31st December 2004, with comparative figures for the financial years from 1st January to 31st December 2003 and from 1st January to 31st December 2002.Composition of the GroupA list of the subsidiary and associated undertakings which, in the opinion of the Directors, principally affected the amount of profit or the net assets of the Group is given in Principal Group companies, Note 38.Composition of financial statementsThe consolidated Financial statements are drawn up in accordance with UK generally accepted accounting principles (UK GAAP) and with UK accounting presentation. 2006 2005 £m £m UK corporation tax 400 172 Overseas taxation 2,310 1,847 Current taxation 2,710 2,019 Deferred taxation (409 ) (103 ) Total 2,301 1,916 Financial statements comprise:•Consolidated statement of profit and loss•Consolidated statement of total recognised gains and losses•Consolidated statement of cash flow•Consolidated balance sheet•Reconciliation of movements in consolidated equity shareholders’ funds•Company balance sheet•Notes to the financial statements.As permitted by Section 230charge for taxation on profit amounting to £2,301 million, represented an effective tax rate of the Companies Act 1985, the profit and loss account of the company is not presented. consolidated statement of total recognised gains and losses includes:•the realised profit attributable to shareholders as reflected in the consolidated statement of profit and loss•the unrealised gain or loss in the value of the Group’s overseas net assets, less related foreign currency borrowings, attributable to currency movements over the period•tax on the above items.The reconciliation of movements in equity shareholders’ funds comprises the items contributing to the increase or decrease over the period in shareholders’ funds. Such items include:•the total recognised gains and losses for the period•dividends paid and proposed•the proceeds of shares issued during the period•the cost of shares purchased as Treasury shares or for cancellation under the share buy-back programme•changes to goodwill, arising on acquisitions prior to 1st January 1998, which has been set directly against reserves.Additional information in accordance with the requirements of US generally accepted accounting principles (US GAAP) is included in the Notes to the Financial statements. In Note 37 a statement of differences, and reconciliations of net income and shareholders’ equity, between UK and US GAAP are provided.Presentation of statement of profit and lossDuring the years 2000 to 2003, a columnar presentation was adopted in the statement of profit and loss in order to illustrate underlying business performance, as this was the primary measure used by management. For this purpose certain items were identified separately and excluded from business performance. These comprised: merger and integration items, including product divestments; costs relating to previously announced manufacturing and other restructuring, and the effect of disposals of subsidiaries. Management believes that exclusion of these items provided a better reflection for those years of the way in which the business was managed and gives an indication of the performance of the Group in terms of those elements of revenue and expenditure which local management is able to influence.For 2004, with the completion of these programmes, the Group is reporting results on a statutory basis only. Growth rates are presented comparing 2004 results both with 2003 business performance results and 2003 statutory results. Management considers that the comparison of 2004 statutory results with 2003 business performance results gives the most appropriate indication of the Group’s performance for that period.Trading profit reflects turnover less: cost of sales, comprising costs of manufacture and external royalties; selling, general and administrative expenditure, comprising the costs of selling, distribution and medical support of currently marketed products and the costs of administration; and the costs of research and development to create future products for sale.Accounting conventionThe Financial statements have been prepared using the historical cost convention.Accounting standardsThe Financial statements comply with applicable UK accounting standards.Accounting principles and policiesThe preparation of the Financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.The Financial statements have been prepared in accordance with the company’s accounting policies approved by the Board and described in Note 2.Notes to the financial statements GlaxoSmithKline972Accounting policiesConsolidationThe consolidated Financial statements include:•the assets and liabilities, and the results and cash flow, of the company and its subsidiary undertakings, including Employee Share Ownership Plan (ESOP) Trusts•the Group’s share of the net assets and results of joint ventures and associated undertakings.The Financial statements of undertakings consolidated are made up to 31st December.Undertakings in which the Group has a material interest are accounted for as subsidiaries where the Group exercises dominant influence, as joint ventures where the Group exercises joint control and as associates where the Group can exercise significant influence.Interests acquired in undertakings are consolidated from the effective date of acquisition and interests sold are consolidated up to the date of disposal.Transactions and balances between subsidiary undertakings are eliminated; no profit is taken on sales between subsidiary undertakings or sales to joint ventures and associated undertakings until the products are sold to customers outside the Group.Goodwill arising on the acquisition of interests in subsidiary undertakings, joint ventures and associated undertakings, representing the excess of the purchase consideration over the Group’s share of the separable net assets acquired, is capitalised as a separate item in the case of subsidiary undertakings and as part of the cost of investment in the case of joint ventures and associated undertakings. Goodwill is denominated in the currency in which the acquisition is made and financed. In the case of acquisitions prior to 1998, goodwill was written off against reserves; on a subsequent disposal of assets from such acquisitions, any related goodwill is removed from consolidated reserves and charged to the consolidated profit and loss account.The Group’s interests in its joint ventures are accounted for using the gross equity method. The Group’s interests in its associated undertakings are accounted for using the equity method.Deferred taxation relief on unrealised intra-Group profit is accounted for only to the extent that it is considered recoverable.Assets and liabilities of overseas subsidiary and associated undertakings and joint ventures including related goodwill, are translated into sterling at rates of exchange ruling at the balance sheet date. The results and cash flows of overseas subsidiary and associated undertakings and joint ventures are translated into sterling using average rates of exchange. Exchange adjustments arising when the opening net assets and the profits for the year retained by overseas subsidiary and associated undertakings and joint ventures are translated into sterling, less exchange differences arising on related foreign currency borrowings, are taken directly to reserves and reported in the statement of total recognised gains and losses.In translating into sterling assets, liabilities, results and cash flows of overseas subsidiary and associated undertakings and joint ventures reported in currencies of hyper-inflationary economies, adjustments are made to reflect current price levels. Any loss on net monetary assets is charged to the consolidated profit and loss account.Foreign currency transactionsForeign currency transactions by Group companies are booked in local currency at the exchange rate ruling on the date of transaction, or at the forward rate if hedged by a forward exchange contract. Foreign currency assets and liabilities are translated into local currency at rates of exchange ruling at the balance sheet date, or at the forward rate. Exchange differences are included in trading profit.RevenueRevenue is recognised in the profit and loss account when goods are supplied or made available to external customers against orders received and when title and risk of loss passes to the customer. Turnover represents net invoice value after the deduction of discounts given at the point of sale, and accruals for estimated future rebates and returns. The methodology and assumptions used to estimate rebates and returns are monitored and adjusted regularly in the light of contractual and historical information and past experience. Turnover also includes co-promotion income where the Group records its share of the revenue but with no related cost of sales. Value added tax and other sales taxes are excluded from revenue.ExpenditureExpenditure is recognised in respect of goods and services received when supplied in accordance with contractual terms. Provision is made when an obligation exists for a future liability in respect of a past event and where the amount of the obligation can be reliably estimated. Advertising and promotion expenditure is charged to the profit and loss account as incurred. Shipment costs on inter-company transfers are charged to cost of sales; distribution costs on sales to customers are included in selling, general and administrative expenditure. Restructuring costs are recognised in respect of the direct expenditures of a business reorganisation where the plans are sufficiently detailed and well advanced, and where appropriate communication to those affected has been undertaken at the balance sheet date.Research and developmentResearch and development expenditure is charged to the profit and loss account in the period in which it is incurred. Tangible fixed assets used for research and development are depreciated in accordance with the Group’s policy.Environmental expenditureEnvironmental expenditure related to existing conditions resulting from past or current operations and from which no current or future benefit is discernible is charged to the profit and loss account. The Group determines its liability on a site-by-site basis and records a liability at the time when it is probable and can be reasonably estimated. This liability includes the Group’s own portion of the costs and also a portion of other potentially responsible parties’ costs when it is probable that they will not be able to satisfy their respective shares of the clean-up obligation. When recoveries of reimbursements are virtually certain they are recorded as assets.Pensions and post-retirement benefitsThe cost of providing pensions and other employee post-retirement benefits is charged to the consolidated profit and loss account on a systematic and rational basis, based on actuarial assumptions, over the period during which benefit is derived from employees’ services. Any difference between this charge and the contributions paid is included as an asset or liability in the consolidated balance sheet.98GlaxoSmithKline Notes to the financial statements2Accounting policies continuedLegal and other disputesProvision is made for anticipated settlement costs where a reasonable estimate can be made of the likely outcome of legal or other disputes against the Group. In addition provision is made for legal and other expenses arising from claims received or other disputes. In respect of product liability claims related to products where there is sufficient history of claims made and settlements, an “incurred but not reported” (IBNR) actuarial technique is used to determine a reasonable estimate of the Group’s exposure to unasserted claims for those products and a provision is made on that basis. No provision is made for other unasserted claims or where an obligation exists under a dispute but it is not possible to make a reasonable estimate. Costs associated with claims made by the Group against third parties are charged to the profit and loss account as they are incurred.Employee share plansIncentives in the form of shares are provided to employees under share option and share award schemes. In respect of certain award schemes and share option grants, the company provides finance to ESOP Trusts to purchase company shares on the open market to meet the company’s obligation to provide shares when employees exercise their option or award. Any excess of the fair value of the shares at the date of the award over the exercise price of the options or awards is charged to the profit and loss account over the periods of service in respect of which the options and awards are granted. In respect of other share option grants, share options when exercised are accounted for as share issues at exercise price. Additional employer costs in respect of options and awards are charged to the profit and loss account over the periods of service.Assets and liabilities of the ESOP Trusts are included in the Group balance sheet. Costs of running the Trusts are charged to the profit and loss account. Company shares held by the Trusts are deducted from other reserves and held at a value which recognises any shortfall in the proceeds receivable from employees on exercise. If there is deemed to be a further permanent impairment in value this is reflected by a transfer to profit and loss account reserve.GoodwillGoodwill is stated at cost less a provision for amortisation. Amortisation is calculated to write off the cost in equal annual instalments over its expected useful life. The useful life is not normally expected to exceed 20 years.Intangible fixed assetsIntangible assets are stated at cost less a provision for amortisation.Acquired licences, patents, know-how and marketing rights are amortised over their estimated useful lives in equal instalments, but no longer than 15 years. Items capitalised are restricted to those related to specific compounds or products which are being developed for commercial applications. The estimated useful lives for determining the amortisation charge are reviewed annually, and take into account the estimated time it takes to bring the compounds or products to market as marketable products. Any development costs which are incurred by the Group and are associated with an acquired licence, patent, know-how or marketing rights are written off to the profit and loss account when incurred.Brands are valued independently as part of the fair value of businesses acquired from third parties where the brand has a value which is substantial and long-term and where the brands can be sold separately from the rest of the businesses acquired. Brands are amortised over the estimated useful lives but no longer than 20 years, except where the end of the useful economic life of the brand cannot be foreseen.Prior to 1998, acquired minor brands and similar intangibles were eliminated in the Group balance sheet against reserves in the year of acquisition.Tangible fixed assetsTangible fixed assets are stated at cost less provisions for depreciation or impairment. The costs of acquiring and developing computer software for internal use and internet sites for external use are capitalised as a tangible fixed asset where the software or site supports a significant business system and the expenditure leads to the creation of a durable asset.Depreciation is calculated to write off the cost of tangible fixed assets, excluding freehold land, in equal annual instalments over their expected useful lives. The normal expected useful lives of the major categories of tangible fixed assets are reviewed annually and are:Freehold buildings20 to 50 yearsLeasehold land andThe shorter of lease term and 50 buildings yearsPlant and machinery10 to 20 yearsFixtures and equipment3 to 10 yearsERP systems software7 yearsOther computer software3 to 5 yearsEnterprise Resource Planning (ERP) systems software generally involves significant customisation prior to implementation and is expected to have a useful economic life of seven years, rather than the maximum five years of other computer software. On disposal of a tangible fixed asset, the cost and related accumulated depreciation are removed from the financial statements and the net amount, less any proceeds, is taken to the consolidated profit and loss account.LeasesLeasing agreements which transfer to the Group substantially all the benefits and risks of ownership of an asset are treated as finance leases, as if the asset had been purchased outright. The assets are included in tangible fixed assets and the capital element of the leasing commitments is shown as obligations under finance leases. Assets held under finance leases are depreciated over the shorter of the lease terms and the useful lives of the assets. The interest element of the lease rental is charged against profit. All other leases are operating leases and the annual rentals are charged against profit on a straight-line basis over the lease term.Impairment of fixed assetsThe carrying values of fixed assets are reviewed for impairment when there is an indication that the assets might be impaired. Any provision for impairment is charged against profit in the year concerned. First year impairment reviews are conducted for acquired goodwill and intangible assets. Certain intangibles are considered to have an indefinite life and are therefore not amortised. Such intangibles are subject to annual impairment tests. Impairment is determined by reference to the higher of net realisable value and value in use, which is measured by reference to discounted future cash flows.Notes to the financial statements GlaxoSmithKline992Accounting policies continuedInvestments in joint ventures and associatesInvestments in joint ventures and associated undertakings are carried in the consolidated balance sheet at the Group’s share of their net assets at date of acquisition and of their post-acquisition retained profits or losses together with any goodwill arising on the acquisition, net of amortisation.StocksStocks are included in the financial statements at the lower of cost (including manufacturing overheads, where appropriate) and net realisable value. Cost is generally determined on a first in, first out basis.TaxationThe Group accounts for taxation which is deferred or accelerated by reason of timing differences which have originated but not reversed by the balance sheet date. Deferred tax assets are only recognised to the extent that they are considered recoverable against future taxable profits. Deferred tax on the retained earnings of overseas subsidiaries is only provided when there is a binding commitment to distribute past earnings in future periods.Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse. Deferred tax liabilities and assets are not discounted.Current asset investmentsCurrent asset investments are stated at the lower of cost and net realisable value.In the case of securities acquired at a significant premium or discount to maturity value, and intended to be held to redemption, cost is adjusted to amortise the premium or discount over the life to maturity of the security. Floating rate bonds are stated at cost. Interest income is taken to the profit and loss account on a receivable basis.Equity investments are included as current assets when regarded as available for sale.Derivative financial instrumentsThe Group does not hold or issue derivative financial instruments for trading purposes.Derivative financial instruments are used to manage exposure to market risks from treasury operations. The principal derivative instruments are currency swaps, forward exchange contracts and interest rate swaps. The derivative contracts are treated from inception as an economic hedge of the underlying financial instrument, with matching accounting treatment and cash flows. The derivative contracts have high correlation with the specific financial instrument being hedged both at inception and throughout the hedge period. Derivative instruments no longer designated as hedges are restated at market value and any future changes in value are taken directly to the profit and loss account.Currency swaps and forward exchange contracts used to fix the value of the related asset or liability in the contract currency and at the contract rate are accrued to the profit and loss account over the life of the contract.Gains and losses on foreign exchange contracts designated as hedges of forecast foreign exchange transactions are deferred and included in the measurement of the related foreign currency transactions in the period they occur. Gains and losses on balance sheet hedges are accrued and are taken directly to reserves, except that forward premiums/discounts are recognised as interest over the life of the contracts.Interest differentials under interest swap agreements are recognised in the profit and loss account by adjustment of interest expense over the life of the agreement.Debt instrumentsDebt instruments are stated at the amount of net proceeds adjusted to amortise the issue cost of debt evenly over the term of the debt.3New accounting policies and future requirementsIn December 2003, the Urgent Issues Task Force issued Abstract 38 and amended Abstract 17, relating to the accounting for and presentation of ESOP Trusts and share options and awards granted to employees. These requirements became mandatory for 2004 reporting and require the shares held by the ESOP Trusts to be shown as a deduction in arriving at shareholders’ funds. The charge to the profit and loss account for employee share options is restricted to the intrinsic loss, the difference between the market price and exercise price, at the date of grant. Comparative data for prior periods has been restated for comparability. Trading profit and profit before tax in 2003 have been reduced by £16 million and net assets at 31st December 2003 by £2,6612006 included a tax payable liability of £621 million and a tax recoverable asset of £186 million. It is not practicable to quantify the effect on 2004 because of the different measurement basis adopted.In June 2002, the Council of the European Union adopted a Regulation requiring listed companies in its Member States to prepare their consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) from 2005. GlaxoSmithKline has completed its conversion project, subject to any changes in standards and pronouncements, and unaudited information for 2004 and 2003 restated onto an IFRS basis, is given on pages 163 to 173.4 Exchange ratesThe Group uses the average of exchange rates prevailing during the period to translate the results and cash flows of overseas subsidiaries, joint ventures and associated undertakings into sterling and period end rates to translate the net assets of those undertakings. The currencies which most influence these translations, and the relevant exchange rates, were: 2004 2003 2002 Average rates: £/US$ 1.83 1.64 1.50 £/Euro 1.47 1.45 1.59 £/Yen 197.00 191.00 188.00 Period end rates: £/US$ 1.92 1.79 1.61 £/Euro 1.41 1.42 1.54 £/Yen 197.00 192.00 192.00 100GlaxoSmithKline Notes to the financial statements5Merger of Glaxo Wellcome and SmithKline BeechamThe combination of Glaxo Wellcome plc and SmithKline Beecham plc was treated as a merger at 27th December 2000 under UK GAAP. Under the merger relief provisions of the Companies Act 1985, the shares issued by GlaxoSmithKline plc to acquire Glaxo Wellcome and SmithKline Beecham were accounted for at par and no share premium arose; the shares acquired by GlaxoSmithKline in Glaxo Wellcome and SmithKline Beecham were similarly accounted for at the nominal value of the shares issued. In the consolidated Financial statements of GlaxoSmithKline, the results and net assets of Glaxo Wellcome and SmithKline Beecham were combined at their book amounts, subject to alignment adjustments.6Segment informationAn analysis of turnover, profit before taxation, total assets and net assets by business and geographical sector, tangible fixed assets by geographical sector and turnover by location of customer are set out below. The business sectors consist of Pharmaceuticals (prescription pharmaceuticals and vaccines) and Consumer Healthcare (oral care, OTC medicines and nutritional healthcare). Assets by business sector in 2003 have been adjusted to ensure consistency with 2004. The geographical sectors reflect the Group’s most significant regional markets and are consistent with the Group’s regional market management reporting structure. Business sector data includes an allocation of corporate costs to each sector. There are no sales between business sectors.The Group’s activities are organised on a global basis. The geographical sector figures are therefore influenced by the location of the Group’s operating resources, in particular manufacturing and research, and by variations over time in intra-Group trading and funding arrangements.Where the Group co-promotes a product and the third party records the sale, the Group records its share of revenue as co-promotion income within turnover. The nature of co-promotion activities is such that the Group records no costs of sales. Pharmaceutical turnover includes co-promotion income of £65 million (2003 – £35 million, 2002 – £nil). 2003 2002 2004 (restated) (restated) Turnover by business sector £m £m £m Pharmaceuticals 17,146 18,181 17,995 Consumer Healthcare 3,213 3,260 3,217 External turnover 20,359 21,441 21,212 Statutory profit before tax by business sector Pharmaceuticals 5,428 5,785 5,085 Consumer Healthcare 662 591 484 Operating profit 6,090 6,376 5,569 Share of profits of joint ventures and associated undertakings 95 93 75 Profit on disposal of interest in associate 138 – – (Loss)/profit on disposal of businesses (1 ) 5 10 Product divestments – – 11 Net interest payable (203 ) (161 ) (141 ) Profit before taxation 6,119 6,313 5,524 Profit before taxation 6,119 6,313 5,524 Taxation (1,701 ) (1,729 ) (1,464 ) Minority interests (114 ) (94 ) (110 ) Preference share dividends (2 ) (12 ) (20 ) Statutory earnings 4,302 4,478 3,930 Total assets by business sector Pharmaceuticals 18,875 17,384 Consumer Healthcare 3,703 3,816 Total assets 22,578 21,200 Net assets by business sector Pharmaceuticals 3,698 3,316 Consumer Healthcare 2,504 2,488 Net assets 6,202 5,804 Notes to the financial statements GlaxoSmithKline1016 Segment information continued 2003 2002 2004 (restated) (restated) Turnover by location of subsidiary undertaking £m £m £m USA 9,524 10,569 11,096 Europe 11,431 11,798 10,423 International 7,847 7,945 6,824 Turnover including inter-segment turnover 28,802 30,312 28,343 USA (289 ) (219 ) (168 ) Europe (4,278 ) (4,690 ) (3,873 ) International (3,876 ) (3,962 ) (3,090 ) Inter-segment turnover (8,443 ) (8,871 ) (7,131 ) USA 9,235 10,350 10,928 Europe 7,153 7,108 6,550 International 3,971 3,983 3,734 External turnover 20,359 21,441 21,212 Statutory profit before tax by location of subsidiary undertaking USA 1,266 1,983 2,117 Europe 2,739 3,045 2,508 International 2,085 1,348 944 Operating profit 6,090 6,376 5,569 Share of profits of joint ventures and associated undertakings 95 93 75 Profit on disposal of interest in associate 138 – – Profit on disposal of businesses (1 ) 5 10 Product divestments – – 11 Net interest payable (203 ) (161 ) (141 ) Profit before taxation 6,119 6,313 5,524 Profit before taxation 6,119 6,313 5,524 Taxation (1,701 ) (1,729 ) (1,464 ) Minority interests (114 ) (94 ) (110 ) Preference share dividends (2 ) (12 ) (20 ) Statutory earnings 4,302 4,478 3,930 Total assets by location of subsidiary undertaking USA 4,351 4,385 Europe 11,374 10,362 International 2,874 2,998 Total operating assets 18,599 17,745 Cash at bank and liquid investments 3,979 3,455 Total assets 22,578 21,200 Net assets by location of subsidiary undertaking USA 233 484 Europe 5,973 4,922 International 1,980 2,046 Net operating assets 8,186 7,452 Net debt (1,984 ) (1,648 ) Net assets 6,202 5,804 102GlaxoSmithKline Notes to the financial statements6 Segment information continued 2004 2003 Plant, Land and equipment Computer Assets in buildings and vehicles software construction Total Total Tangible fixed assets by location of subsidiary undertaking £m £m £m £m £m £m USA 662 399 40 157 1,258 1,295 Europe 1,591 2,023 159 500 4,273 4,184 International 503 357 11 69 940 962 Total 2,756 2,779 210 726 6,471 6,441 2004 2003 2002 Turnover by location of customer £m £m £m USA 9,243 10,333 10,807 Europe 6,658 6,611 6,064 International 4,458 4,497 4,341 External turnover 20,359 21,441 21,212 UK segmentInformation is given separately in respect of the UK, which, although included in the Group’s Europe market region, is considered the Group’s home segment for the purposes of segmental reporting. 2003 2002 2004 (restated) (restated) £m £m £m Turnover by location of customer 1,461 1,404 1,366 Turnover including inter-segment turnover 4,467 4,678 4,945 Inter-segment turnover (2,709 ) (2,883 ) (3,230 ) Turnover by location of subsidiary 1,758 1,795 1,715 Operating profit 1,403 1,519 1,294 Total assets 7,578 7,145 Net operating assets 2,635 2,023 7 Merger items, restructuring costs and divested businessesManufacturing and other restructuring costs were incurred by GlaxoSmithKline during 2003 and 2002 in the implementation of previously announced plans for the restructuring of manufacturing and other activities.Merger integration costs relate to the integration of Glaxo Wellcome and SmithKline Beecham into a unified GlaxoSmithKline business. These costs include consultancy fees in respect of integration planning, severance costs, asset write-offs, costs related to the early vesting or lapse of performance conditions on share options and share incentive awards and costs of the programme to encourage staff to convert Glaxo Wellcome and SmithKline Beecham share options into GlaxoSmithKline share options. Integration costs were incurred in 2003 and 2002 relating to the integration of the Block Drug businesses. These costs include professional fees, severance costs and asset write-offs.Product divestment income arising in 2002 related to the finalisation of the disposals of Famvir, Kytril and other products required in 2000 in order to obtain regulatory approval for the merger.The disposal of businesses in 2003 and 2002 related to the finalisation of the disposals of Clinical Laboratories and Healthcare Services in 1999.Notes to the financial statements GlaxoSmithKline1037Merger items, restructuring costs and divested businesses continued Disposal of Merger Restructuring Block Drug subsidiaries Total 2003 £m £m £m £m £m Manufacturing and other restructuring – (83 ) – – (83 ) Merger integration costs (286 ) – – – (286 ) Block Drug integration costs – – (26 ) – (26 ) Effect on operating profit (286 ) (83 ) (26 ) – (395 ) Profit on disposal of businesses – – – 5 5 Effect on profit before tax (286 ) (83 ) (26 ) 5 (390 ) Effect on taxation – operating items 98 Effect on taxation – non-operating items 11 Effect on taxation 109 Effect on earnings (281 ) Disposal of Merger Restructuring Block Drug subsidiaries Total 2002 £m £m £m £m £m Manufacturing and other restructuring – (121 ) – – (121 ) Merger integration costs (851 ) – – – (851 ) Block Drug integration costs – – (60 ) – (60 ) Effect on operating profit (851 ) (121 ) (60 ) – (1,032 ) Product divestments 11 – – – 11 Profit on disposal of businesses – – – 10 10 Effect on profit before tax (840 ) (121 ) (60 ) 10 (1,011 ) Effect on taxation – operating items 266 Effect on taxation – non-operating items 33 Effect on taxation 299 Effect on earnings (712 ) 8Other operating income/(expense) 2004 2003 2002 £m £m £m Royalties and other income 96 75 75 Other operating expense (296 ) (436 ) (209 ) (200 ) (361 ) (134 ) Income from equity investments and other disposals 140 228 23 (60 ) (133 ) (111 ) Royalties and other income is principally a core of recurring income in the form of royalties from the out-licensing of intellectual property. Other operating expense includes litigation costs and provisions relating to legal claims on withdrawn products, product withdrawals, anti-trust matters and claims with respect to sales, marketing and reimbursement. Income from equity investments and other disposals includes equity investment carrying value adjustments arising from stock market changes, product disposals and equity investment sales.104GlaxoSmithKline Notes to the financial statements9Operating profit 2003 2002 2004 (restated) (restated) £m £m £m The following items have been charged in operating profit: Employee costs (Note 35) 4,704 5,074 4,922 Advertising 599 615 688 Distribution costs 271 284 281 Depreciation of tangible fixed assets: Owned assets 780 771 760 Leased assets 5 2 4 Amortisation of goodwill 12 13 12 Amortisation of intangible fixed assets 94 74 60 Exchange losses on foreign currency deposits/loans – (1 ) – Operating lease rentals: Plant 56 90 50 Land and buildings 63 62 61 Audit fees 7.2 6.9 6.1 Fees to auditors for other work: Auditors’ UK firm 2.6 1.7 5.2 Auditors’ overseas firms 4.7 5.9 9.6 Analysis of fees to auditors for other work: Further assurance (audit-related) services 3.4 2.6 1.8 Tax services 3.0 4.6 4.9 Merger of Glaxo Wellcome and SmithKline Beecham – – 6.0 Other services 0.9 0.4 2.1 Included within audit fees above is a fee of £10,000 (2003 – £10,000, 2002 – £10,000) relating to the company audit of GlaxoSmithKline plc. Included in further assurance services in 2004 and 2003 are amounts related to the Group’s preparation for the adoption of International Financial Reporting Standards and preparation for section 404 of the Sarbanes-Oxley Act 2002. Tax services relates to fees paid for corporate tax compliance, tax planning and advice. Other services include human resources advisory, compliance and treasury related services. Included within fees to auditors for other work in 2002 is £6.0 million paid to the auditor’s management consulting practice, which was sold by them in 2002. In 2004 and 2003, the Group applied discounting to certain long-term assets and liabilities, using risk-free rates of return. 10 Joint ventures and associated undertakings 2004 2003 2002 £m £m £m Associated undertakings: Share of profits of Quest Diagnostics Inc. 100 102 94 Share of losses of other associated undertakings (1 ) (3 ) – Amortisation of goodwill (5 ) (6 ) (6 ) 94 93 88 Share of profits/(losses) of joint ventures 1 – (13 ) 95 93 75 Share of turnover of joint ventures 31 31 29 Sales to joint ventures and associated undertakings 50 51 49 Notes to the financial statements GlaxoSmithKline105
| 2004 | 2003 | 2002 | |||||
| £m | £m | £m | |||||
| Interest payable | |||||||
| On bank loans and overdrafts | (6 | ) | (6 | ) | (6 | ) | |
| On other loans | (273 | ) | (186 | ) | (198 | ) | |
| In respect of finance leases | (2 | ) | (2 | ) | (2 | ) | |
| Realised losses | (1 | ) | – | – | |||
| Unwinding of discount on provisions | (16 | ) | (20 | ) | – | ||
| (298 | ) | (214 | ) | (206 | ) | ||
| Share of interest payable of associate | (7 | ) | (8 | ) | (8 | ) | |
| (305 | ) | (222 | ) | (214 | ) | ||
| Investment income | |||||||
| Interest income | 99 | 58 | 71 | ||||
| Realised gains | – | – | 2 | ||||
| Unwinding of discount on assets | 3 | 3 | – | ||||
| 102 | 61 | 73 | |||||
| (203 | ) | (161 | ) | (141 | ) | ||
| 12 | Taxation | ||||||
| 2003 | 2002 | ||||||
| 2004 | (restated) | (restated) | |||||
| Taxation charge based on profits for the period | £m | £m | £m | ||||
| UK corporation tax at the UK statutory rate | 429 | 673 | 479 | ||||
| Less double taxation relief | (156 | ) | (290 | ) | (117 | ) | |
| 273 | 383 | 362 | |||||
| Overseas taxation | 1,394 | 1,578 | 1,036 | ||||
| Deferred taxation | (6 | ) | (272 | ) | 32 | ||
| 1,661 | 1,689 | 1,430 | |||||
| Share of taxation charge of associates | 40 | 40 | 34 | ||||
| 1,701 | 1,729 | 1,464 | |||||
| 2003 | 2002 | ||||||
| 2004 | (restated) | (restated) | |||||
| Reconciliation of the current taxation rate on Group profits | % | % | % | ||||
| UK statutory rate of taxation | 30.0 | 30.0 | 30.0 | ||||
| Overseas taxes | 1.2 | 0.1 | 0.1 | ||||
| Average Group tax rate | 31.2 | 30.1 | 30.1 | ||||
| Effect of special tax status in manufacturing locations | (3.6 | ) | (3.9 | ) | (3.9 | ) | |
| Share option deductions | (0.2 | ) | (0.1 | ) | (0.2 | ) | |
| Merger and restructuring costs | – | (0.1 | ) | 0.7 | |||
| R&D credits | (1.5 | ) | (1.1 | ) | (1.2 | ) | |
| Other permanent differences | 2.1 | 1.1 | (0.8 | ) | |||
| Capital allowances in excess of depreciation | 0.3 | (0.3 | ) | (0.5 | ) | ||
| Intra-Group profit | 0.3 | (0.1 | ) | 1.3 | |||
| Reversing timing differences on tax losses | (1.6 | ) | – | – | |||
| Other timing differences | (0.7 | ) | 4.0 | 2.2 | |||
| Prior year items | 1.0 | 1.5 | (2.4 | ) | |||
| Current tax rate on ordinary activities | 27.3 | 31.1 | 25.3 | ||||
| Capital allowances in excess of depreciation | (0.3 | ) | 0.3 | 0.5 | |||
| Intra-Group profit | (0.3 | ) | 0.1 | (1.3 | ) | ||
| Reversing timing differences on tax losses | 1.6 | – | – | ||||
| Other timing differences | 0.7 | (4.0 | ) | (2.2 | ) | ||
| Share of taxation charge of associates | 0.6 | 0.6 | 0.6 | ||||
| Prior year items | (1.8 | ) | (0.6 | ) | 3.6 | ||
| UITF 17 restatement | – | (0.1 | ) | – | |||
| Tax rate on ordinary activities | 27.8 | 27.4 | 26.5 | ||||
The Group operates in countries where the tax rate differs from the UK tax rate. The average Group tax rate has been determined by aggregating the local standard tax rates and weighting these in proportion to accounting profits. Profits arising from manufacturing operations in Singapore, Puerto Rico and Ireland are taxed at reduced rates. The effect of this reduction in the taxation charge increased earnings per share by 3.8p in 2004, 4.2p in 2003 and 3.7p in 2002.
12Taxation continued
The integrated nature of the Group’s worldwide operations, involving significant investment in research and strategic manufacture at a limited number of locations, with consequential cross-border supply routes into numerous end-markets, gives rise to complexity and delay in negotiations with revenue authorities as to the profits on which individual Group companies are liable to tax. Disagreements with, and between, revenue authorities as to intra-Group transactions, in particular the price at which goods should be transferred between Group companies in different tax jurisdictions, can produce conflicting claims from revenue authorities as to the profits to be taxed in individual territories. Resolution of such issues is a continuing fact of life for GlaxoSmithKline.GSK. The Group hashad significant open issues with the revenue authorities in the USA, UK, Japan and Canada. By far the largest relates to Glaxo heritage products, in respect of whichOn 11th September 2006 GSK and the US Internal Revenue Service (IRS)agreed to a resolution of their dispute.
Profit for the year
| 2006 | 2005 | Growth | ||||||
| £m | £m | CER% | £% | |||||
| Profit after taxation for the year | 5,498 | 4,816 | 17 | 14 | ||||
Profit attributable to shareholders | 5,389 | 4,689 | 18 | 15 | ||||
| Earnings per share (pence) | 95.5 | p | 82.6 | p | 19 | 16 | ||
| Earnings per ADS (US$) | $3.53 | $3.00 | ||||||
| Weighted average number of shares (millions) | 5,643 | 5,674 | ||||||
| Diluted earnings per share (pence) | 94.5 | p | 82.0 | p | ||||
| Diluted earnings per ADS (US$) | $3.50 | $2.98 | ||||||
Weighted average number of shares (millions) | ||||||||
| 5,700 | 5,720 | |||||||
Profit for the year was £5,498 million, an increase of 17% (14% in sterling terms). Profit attributable to minority interests was £109 million and profit attributable to shareholders was £5,389 million, an increase of 18% (15% in sterling terms). The interest cost of the share buy-back adversely impacted the Group’s earnings but benefits Earnings per share (EPS). EPS increased 19%, reflecting higher profits and also the reduction in the weighted average number of shares resulting from the Group’s share buy-back programme. At actual rates of exchange, earnings per share increased 16%. The unfavourable currency impact on EPS of three percentage points reflected a strengthening of Sterling against other major currencies and compared with a two percentage point unfavourable currency impact on turnover.
| 58 | GSK Annual Report 2007 |
| REPORT OF THE DIRECTORS | |
| Corporate governance | |
| Corporate governance | |
| The corporate governance section discusses GlaxoSmithKline’s management structures and governance procedures. | |
| It contains the company’s reporting disclosures on corporate governance required by the Combined Code on Corporate Governance of the Financial Reporting Council (Combined Code), including the required statement of compliance. | |
| The section also contains the company’s reports on compliance with the US laws and regulations that apply to it. | |
| The Board | 60 |
| Corporate Executive Team | 61 |
| Governance and policy | 62 |
| Dialogue with shareholders | 64 |
| Share capital and control | 64 |
| Donations to Political Organisations and EU Political Expenditure | 65 |
| Annual General Meeting | 65 |
| Internal control framework | 66 |
| Committee reports | 67 |
| The Combined Code | 69 |
| US law and regulation | 69 |
| GSK Annual Report 2007 | 59 |
| REPORT OF THE DIRECTORS | |
| Corporate governance | |
| Corporate governance | |
| continued | |
Sir Christopher Gent (Aged 59)
Appointed on 1st June 2004. Chairman. Sir Christopher was the Chief Executive Officer of Vodafone Group plc, until his retirement in July 2003. He is a Non-Executive Director of Lehman Brothers Holdings Inc., a Non-Executive Director of Ferrari S.p.A., a member of KPMG’s Chairman’s Advisory Group, a Senior Adviser at Bain & Co. and a member of the Advisory Board of Reform.
Dr Jean-Pierre Garnier (Aged 60)
Appointed on 23rd May 2000. Retiring on 21st May 2008. Chief Executive Officer. Dr Garnier was appointed an Executive Director of SmithKline Beecham plc in 1992, and became Chief Executive Officer in April 2000. He is a Non-Executive Director of United Technologies Corporation and a member of the Board of Overseers of the Weill Cornell Medical College.
Andrew Witty (Aged 43)
Appointed on 31st January 2008. CEO Designate. He will succeed Dr Garnier on 21st May 2008. Mr Witty joined the Group in 1985 and has held senior positions in Asia, Africa, Europe and the USA. In January 2003 he was appointed President, Pharmaceuticals Europe. He has served as a board member of the Singapore Economic Development Board. He is a member of the INSEAD UK Inland Revenue have made competingCouncil, a Director of the Office for Strategic Coordination of Health Research, sits on the Imperial College Commercialisation Advisory Board and contradictory claims.is a member of the Health Innovation Council in the UK.
GlaxoSmithKlineProfessor Sir Roy Anderson (Aged 60)
Appointed on 1st October 2007. Non-Executive Director. Professor Anderson is the Professor of Infectious Disease Epidemiology in the Faculty of Medicine, Imperial College, London and until September 2007, was the Chief Scientific Adviser at the Ministry of Defence in the UK. He will become Rector of Imperial College in July 2008.
Dr Stephanie Burns (Aged 53)
Appointed on 12th February 2007. Non-Executive Director. Dr Burns is Chairman, President and Chief Executive Officer of Dow Corning Corporation. She is also a member of the American Chemical Society and sits on the Executive Committee of the Society of Chemical Industry, America Section, serves on the Board of Directors of the American Chemistry Council, and on the Board of Directors for the Society for Women’s Health Research. Dr Burns holds a PhD in organic chemistry from Iowa State University.
Lawrence Culp (Aged 44)
Appointed on 1st July 2003. Non-Executive Director. Mr Culp is President and Chief Executive Officer of Danaher Corporation. Prior to joining Danaher, he held positions in Accenture, previously Andersen Consulting.
Sir Crispin Davis (Aged 58)
Appointed on 1st July 2003. Non-Executive Director. Sir Crispin is Chief Executive of Reed Elsevier PLC. Prior to that, he was Chief Executive of Aegis Group plc, which he joined from Guinness plc, where he was a member of the main board and Group Managing Director of United Distillers. He spent his early career with Procter & Gamble.
Julian Heslop (Aged 54)
Appointed on 1st April 2005. Chief Financial Officer. Mr Heslop joined Glaxo Wellcome as Financial Controller in April 1998. In January 2001 he was appointed Senior Vice President, Operations Controller. Prior to joining the Group he held senior finance roles at Grand Metropolitan.
Sir Deryck Maughan (Aged 60)
Appointed on 1st June 2004. Non-Executive Director. Sir Deryck is a Managing Director of Kohlberg Kravis Roberts & Co. He was formerly Chairman and CEO of Citigroup International and of Salomon Brothers Inc. He is a Non-Executive Director of Reuters Group plc and BlackRock Inc.
Dr Daniel Podolsky (Aged 54)
Appointed on 1st July 2006. Non-Executive Director. Dr Podolsky is Mallinckrodt Professor of Medicine and Chief of Gastroenterology at Massachusetts General Hospital and Harvard Medical School as well as Chief Academic Officer of Partners HealthCare System. He is also Chairman of the Board and Scientific Co-Founder of the GI Company.
Sir Ian Prosser (Aged 64)
Appointed on 23rd May 2000. Senior Independent Director. Sir Ian was formerly a Non-Executive Director of SmithKline Beecham plc. He is Non-Executive Deputy Chairman of BP plc, a Non-Executive Director of Sara Lee Corporation and a member of the CBI President’s Committee.
Dr Ronaldo Schmitz (Aged 69)
Appointed on 23rd May 2000. Non-Executive Director. Dr Schmitz was formerly a Non-Executive Director of Glaxo Wellcome plc. He is a Non-Executive Director of Legal & General Group plc, a member of the Board of Directors of Rohm and Haas Company and Cabot Corporation and of the Supervisory Board of SICK AG.
Dr Moncef Slaoui (Aged 48)
Appointed on 17th May 2006. Chairman, Research & Development. Dr Slaoui joined GSK Biologicals in 1988 where he engineered the development of a robust vaccines pipeline. He has attempteda PhD in Molecular Biology and Immunology from Université Libre de Bruxelles.
Tom de Swaan (Aged 61)
Appointed on 1st January 2006. Non-Executive Director. Mr de Swaan was a member of the Managing Board and Chief Financial Officer of ABN AMRO until January 2006. He is a member of the Board of Directors of Zurich Financial Services and Vice Chairman of the Supervisory Board and Chairman of the Audit Committee of Royal Ahold, a member of the Supervisory Boards of Royal DSM and of Corporate Express, and Vice Chairman of the Supervisory Board of VanLanschot Bankiers.
Christopher Viehbacher (Aged 47)
Appointed on 31st January 2008. President, US Pharmaceuticals. Mr Viehbacher joined the Group in 1988 and has held a variety of senior positions in Europe and Canada. He was appointed President, US Pharmaceuticals in January 2003. He served on the European Commission approved G10 working group to settlerestore the US dispute, first through direct discussioncompetitiveness of the EU Pharmaceutical industry. He is a board member of PhRMA, the CEO Roundtable on Cancer and Research!America.
Sir Robert Wilson (Aged 64)
Appointed on 1st November 2003. Non-Executive Director. Sir Robert is Non-Executive Chairman of BG Group plc and The Economist Group and was previously Executive Chairman of Rio Tinto.
Details of membership of the Board Committees may be found on page 63.
| 60 | GSK Annual Report 2007 |
| REPORT OF THE DIRECTORS | |
| Corporate governance | |
| Corporate governance | |
| continued | |
Corporate Executive Team (CET)
JP Garnier
Chief Executive Officer
As Chief Executive Officer, Dr Garnier is responsible for the management of the Group. He oversees all operational aspects of the Group, including establishing policies, objectives and initiatives, and he directs long-term strategy. He was formerly Chief Executive Officer of SmithKline Beecham, having joined the Group in 1990.
Andrew Witty
CEO Designate
Mr Witty was appointed CEO Designate in October 2007, and will succeed JP Garnier as CEO May 2008. He joined Glaxo in 1985. During his career with the IRScompany he has held the roles of Vice President and subsequently through discussions betweenGeneral Manager, Marketing for Glaxo Wellcome Inc., in the US, and Senior Vice President, Asia Pacific. He was appointed President, Pharmaceuticals Europe for GlaxoSmithKline in January 2003.
Rupert Bondy
Senior Vice President and General Counsel
Mr Bondy is responsible for legal matters across the Group, together with environment, health and safety issues and security. He was a lawyer in private practice before joining SmithKline Beecham. He will leave GSK in March 2008.
John Clarke
President, Consumer Healthcare
Mr Clarke is responsible for the Consumer Healthcare business which produces oral, over-the-counter and nutritional healthcare products. He joined Beecham in 1976 and was the President of the Futures Group before his current appointment in January 2006.
Marc Dunoyer
President, Pharmaceuticals Japan
Mr Dunoyer was appointed President, Pharmaceuticals Japan in March 2003. He joined the Group in 1999 and was Senior Vice President and Regional Director, Japan until his current appointment.
Eddie Gray
President, Pharmaceuticals Europe
Mr Gray became responsible for the Group’s operations in Europe in January 2008. He joined Beecham in 1988 and, prior to his current appointment, was Senior Vice President and General Manager, Pharmaceuticals UK.
Russell Greig
President, Pharmaceuticals International
Dr Greig leads the pharmaceutical operations outside the USA, Japan and most of Europe, covering more than 100 countries. He joined the Group in 1980 and was Senior Vice President, Worldwide Business Development for R&D prior to his current appointment in March 2003.
Julian Heslop
Chief Financial Officer
Mr Heslop became Chief Financial Officer on 1st April 2005. As head of the finance function Mr Heslop is responsible for activities such as financial reporting and control, tax and treasury, finance systems, internal audit, insurance and real estate. He joined Glaxo Wellcome as Financial Controller in April 1998.
Duncan Learmouth
Senior Vice President, Corporate Communications and Community Partnerships
Mr Learmouth is responsible for the Group’s investor relations, internal and external communications, its image and partnerships with global communities. He joined Glaxo in 1991 and was Vice President, Global Investor Relations, before appointment to his current position in July 2006.
Bill Louv
Chief Information Officer
Mr Louv succeeded Dr Calhoun as Chief Information Officer in January 2007. He is responsible for information technology, a global function that enables key business processes across all parts of the Group. He joined the Group in 1994 and has held a number of increasingly senior roles in IT, including for US Pharmaceuticals and GSK’s R&D functions.
Dan Phelan
Senior Vice President, Human Resources
Mr Phelan is responsible for benefits, compensation, recruitment, organisation development, leadership development and succession planning, human resource information systems and employee health management. He was a lawyer in private practice before joining Smith Kline & French in 1981.
David Pulman
President, Global Manufacturing and Supply
Dr Pulman is responsible for the Global Manufacturing and Supply organisation and Global Procurement. He trained as a microbiologist and joined Glaxo in 1978. He has broad experience of manufacturing operations having previously led the Primary Supply, European manufacturing, North American manufacturing, Global Logistics and Manufacturing Strategy organisations.
Moncef Slaoui
Chairman, Research & Development
Dr Slaoui leads the Group’s complex drug discovery and development activities. He joined the Group in 1988 and was Senior Vice President, Worldwide Business Development until his current appointment in June 2006.
Chris Viehbacher
President, US Pharmaceuticals
Mr Viehbacher is responsible for US Pharmaceuticals. He joined Wellcome in 1988 and was responsible for GSK’s European Pharmaceuticals business before his current appointment in 2003.
Other members
Dr Calhoun retired as Chief Information Officer on 31st January 2007. Mr Stout left the Group in February 2008. Mr Ingram continues to act as a special consultant to the Group and attends CET meetings in that capacity.
| GSK Annual Report 2007 | 61 |
| REPORT OF THE DIRECTORS | |
| Corporate governance | |
| Corporate governance | |
| continued | |
The Board and Corporate Executive Team
The Directors are listed under ‘The Board’ on page 60.
The Board is responsible for the Group’s system of corporate governance and is ultimately accountable for the Group’s activities, strategy and financial performance.
The Chief Executive Officer (CEO) is responsible for executive management of the Group and is assisted by the CET. The CET meets 11 times per year and otherwise as necessary. The members and their responsibilities are listed under ‘Corporate Executive Team’ (page 61).
The Board comprises five Executive and eleven Non-Executive Directors. The Board considers all its Non-Executive Directors to be independent in character and judgement. Dr Schmitz has served on the Board for more than nine years, having been appointed to the Board of Glaxo Wellcome plc on 1st January 1997. During consideration of the Annual Review of Board effectiveness at its meeting in December 2007, the Board concluded that Dr Schmitz remained independent, notwithstanding his length of service. In the opinion of the Board, Dr Schmitz continued to demonstrate the characteristics of independence, such as objectively challenging management and taking part in rigorous debate, while at the same time possessing an outstanding knowledge of the company’s business and affairs, together with his experience gained as Chairman of the Audit Committee. In a long cycle investment business, such as GSK, it was considered to be particularly important to have experienced members on the Board. When Sir Christopher Gent was appointed to the Board as Deputy Chairman, he was determined by the Board to be independent. Upon taking up the chairmanship of the Board on 1st January 2005, in accordance with the Combined Code, he was excluded from the determination of whether at least half the Board are independent Non-Executive Directors. Sir Christopher Gent did not hold a position on a Board Committee where independence was required under the Combined Code. He has however been appointed a member of the Remuneration Committee effective 1st January 2007 following the recent change to the Combined Code.
The Board considers that Professor Sir Roy Anderson, Dr Burns, Mr Culp, Sir Crispin Davis, Sir Deryck Maughan, Dr Podolsky, Sir Ian Prosser, Dr Schmitz, Mr de Swaan and Sir Robert Wilson are independent in accordance with the recommendations of the Combined Code.
At the date of publication and throughout 2007, a majority of the Board members, excluding the Chairman, were independent Non-Executive Directors.
Sir Christopher Gent succeeded Sir Christopher Hogg on 1st January 2005 and chaired the company throughout 2007. Dr Garnier is the CEO. He will retire from the Board at the end of the AGM on 21st May 2008 and Mr Andrew Witty will succeed him as CEO. Mr Witty’s biographical details can be found on page 60. Mr Witty was appointed to the Board on 31st January 2008. The Chairman leads the Board, and represents the Board to the CEO and other CET members as necessary between Board meetings. The CEO manages the Group and implements the strategy and policies adopted by the Board. The Chairman and the chairmen of Board Committees communicate regularly with the CEO and other CET members. The division of responsibilities between the role of Chairman and the CEO has been set out in writing, agreed by the Board and appears in full on the company’s website.
Sir Ian Prosser was appointed Senior Independent Director (SID) on 1st January 2005 and held this role throughout 2007.
| Board process | |
| The Board has the authority, and is accountable to shareholders, for ensuring that the company is appropriately managed and achieves the strategic objectives it sets. The Board discharges those responsibilities through an annual programme of meetings which includes the approval of overall budgetary planning and business strategy. The Board reviews the company’s internal controls and risk management policies and approves its governance structure and code of ethics. | |
| The Board appraises and approves major financing, investment and licensing decisions in excess of defined thresholds. In addition, the Board evaluates and monitors the performance of the Group as a whole. This includes: | |
| • | engaging at Board meetings with the CEO, the other Executive Directors and members of the CET as appropriate, on the financial and operating performance of GSK and external issues material to the Group’s prospects |
| • | evaluating progress toward the achievement of the Group’s financial and business objectives and annual plans |
| • | monitoring, through reports received directly or from various committees, the significant risks facing the Group. |
The Board has overall responsibility for succession planning for the CEO and the other Executive Directors. The Board has given the CEO broad authority to operate the business of the Group, and the CEO is accountable for, and reports to the Board on the performance of the business.
CET members make regular presentations to the Board on their areas of responsibility, and the Board meets with all the CET members on an annual basis to discuss collectively the Group’s strategy.
A primary element of the induction process for new Non-Executive Directors is undertaken by members of the CET, and all Non-Executive Directors are encouraged to have separate informal discussions at their discretion with any CET members.
The Board met six times in 2007, with each member attending as follows:
| Number of meetings | Number of | |||
| Name | held whilst a Board member | meetings attended | ||
| Sir Christopher Gent | 6 | 6 | ||
| Dr JP Garnier | 6 | 6 | ||
| Mr J Heslop | 6 | 6 | ||
| Dr M Slaoui | 6 | 6 | ||
| Professor Sir Roy Anderson* | 2 | 2 | ||
| Dr S Burns* | 5 | 5 | ||
| Mr L Culp | 6 | 6 | ||
| Sir Crispin Davis | 6 | 6 | ||
| Sir Deryck Maughan | 6 | 6 | ||
| Dr D Podolsky | 6 | 6 | ||
| Sir Ian Prosser | 6 | 6 | ||
| Dr R Schmitz | 6 | 6 | ||
| Mr T de Swaan | 6 | 6 | ||
| Sir Robert Wilson | 6 | 6 | ||
| * | Professor Anderson joined the Board on 1st October 2007 and Dr Burns joined on 12th February 2007. |
In addition to the 6 scheduled meetings, the Board also met on a quorate basis on 3 occasions.
| 62 | GSK Annual Report 2007 |
| REPORT OF THE DIRECTORS | |
| Corporate governance | |
| Corporate governance | |
| continued | |
Business environment development
To ensure that the Board is kept up-to-date on important matters, including legal, governance and regulatory developments, presentations are made on a regular basis by both external and internal advisers.
Independent advice
The Board recognises that there may be occasions when one or more of the Directors feel it is necessary to take independent legal and/or financial advice at the company’s expense. There is an agreed procedure to enable them to do so. This is explained in the Corporate Governance section of the company’s website.
Indemnification of Directors
Qualifying third party indemnity provisions (as defined in section 234 of the Companies Act 2006) are in force for the benefit of the Directors and former Directors who held office during 2007.
Company Secretary
The Company Secretary is responsible to the Board and is available to individual Directors in respect of Board procedures. The Company Secretary is Mr Simon Bicknell, who was appointed in May 2000. He is a barrister and joined the Group in 1984. He is secretary to all of the Board Committees.
Board Committees
The Board has established a number of Committees and provides sufficient resources to enable them to undertake their duties. Executive Directors are not members of the Audit, Remuneration, Nominations or Corporate Responsibility Committees, although they may be invited to attend meetings. Each Director is a member of the Corporate Administration & Transactions and Financial Results Committees. Membership of these Committees is shown in the table below.
| Corporate | ||||||||
| Audit | Remuneration | Nominations | Responsibility | |||||
| Sir Christopher Gent | – | M | C | C | ||||
| Professor Sir Roy Anderson | – | – | – | – | ||||
| Dr S Burns | – | – | – | M | ||||
| Mr L Culp | – | M | – | – | ||||
| Sir Crispin Davis | – | M | – | – | ||||
| Sir Deryck Maughan | M | – | – | – | ||||
| Dr D Podolsky | M | – | – | M | ||||
| Sir Ian Prosser | M | – | M | M | ||||
| Dr R Schmitz | M | M | M | – | ||||
| Mr T de Swaan | C | – | – | M | ||||
| Sir Robert Wilson | M | C | – | – | ||||
| Key: C = Chairman M = Member |
The following is a summary of the role and terms of reference of each Committee. The current full terms of reference of each Committee may be obtained from the Company Secretary or the Corporate Governance section of the company’s website.
Audit Committee
The Audit Committee reviews the financial and internal reporting process, the system of internal controls, the management of risks and the external and internal audit process. The Committee also proposes to shareholders the appointment of the external auditors and is directly responsible for their remuneration and oversight of their work. The Committee consists entirely of independent Non-Executive Directors. It meets at least four times a year and otherwise as necessary. The Audit Committee Report is on pages 67 to 68.
Remuneration Committee
The Remuneration Committee determines the terms of service and remuneration of the Executive Directors and members of the CET and, with the assistance of external independent advisors, it evaluates and makes recommendations to the Board on overall executive remuneration policy. The Committee consists entirely of independent Non-Executive Directors, together with the Chairman, in accordance with the Combined Code. It meets at least four times a year and otherwise as necessary. Information on the remuneration of Directors is given in the Remuneration Report on pages 71 to 86.
The Chairman of the company and the CEO are responsible for evaluating and making recommendations to the Board on the remuneration of the Non-Executive Directors.
Nominations Committee
The Nominations Committee reviews the structure, size and composition of the Board and the appointment of members to the Board and the CET, and makes recommendations to the Board as appropriate. The Committee also monitors the planning of succession to the Board and Senior Management. The Committee consists entirely of Non-Executive Directors, of whom a majority are independent, and meets at least once a year and otherwise as necessary. The Nominations Committee Report is given on pages 68 to 69.
Corporate Responsibility Committee
The Corporate Responsibility Committee consists entirely of Non-Executive Directors and provides a Board-level forum for the regular review of external issues that have the potential for serious impact upon the Group’s business and reputation and for the oversight of reputation and the views of external stakeholders. The Committee is also responsible for governance oversight of the Group’s worldwide donations and community support. The Committee meets formally three times a year and otherwise as necessary. The Corporate Responsibility Committee Report is given on page 69.
Financial Results Committee
The Financial Results Committee reviews and approves, on behalf of the Board, the Annual Report and Form 20-F, the Annual Review and the convening of the Annual General Meeting, together with the preliminary and quarterly statements of trading results. Each Director is a member of the Committee and the quorum for a meeting is any three members. To be quorate, each meeting must include the Chairman or the Chairman of the Audit Committee and the CEO or the Chief Financial Officer (CFO). The Committee meets as necessary.
Corporate Administration & Transactions Committee
The Corporate Administration & Transactions Committee reviews and approves matters in connection with the administration of the Group’s business, and certain corporate transactions. The Committee consists of the Directors, CET members and the Company Secretary. The Committee meets as necessary.
Evaluation of the Board, Board Committees and Directors
The performance evaluation of the Chairman, the Board, its Committees and Directors during 2007 was undertaken by the SID and implemented in collaboration with the Committee Chairmen, with the support of the Company Secretary. The Board considered the review conclusions at its meeting in December 2007 and agreed a number of minor improvements to its procedures and operating methodology.
The Audit Committee Chairman undertook the review of the Audit Committee for 2007, building on the work undertaken by an external consultant’s review of the Committee in 2006.
| GSK Annual Report 2007 | 63 |
| REPORT OF THE DIRECTORS | |
| Corporate governance | |
| Corporate governance | |
| continued | |
Financial results are announced quarterly.
The company reports formally to shareholders twice a year, when its half-year and full-year results are announced. The full-year results are included in the company’s Annual Report and Annual Review, which are published for shareholders. In 2007, the company’s half-year results were published in a national newspaper shortly after release. The CEO and CFO give presentations on the full-year results to institutional investors, analysts and the media.
There are webcast teleconferences after the release of the first, second and third quarter results for institutional investors, analysts and the media. The Annual Report, Annual Review and quarterly results are available on the company’s website.
The Annual General Meeting (AGM) takes place in London, and formal notification is sent to shareholders at least one month in advance. At the Meeting, a business presentation is made to shareholders and all Directors able to attend are available, formally during the AGM, and informally afterwards, for questions. Committee Chairmen ordinarily attend the AGM to respond to shareholders’ questions. The entire Board was in attendance at the company’s AGM in May 2007. All resolutions at the AGM are decided on a poll as required by the company’s Articles of Association. The results of the poll are announced to the London Stock Exchange and posted on the company’s website. Details of the 2008 AGM are set out in the section ‘Annual General Meeting’ (see page 65) and the Notice of AGM is published on the company’s website.
To ensure that the Non-Executive Directors are aware of and understand the views of major shareholders about the company, the Board has in place a process focusing on sector-specific issues, as well as general shareholder preferences.
The CEO and CFO maintain a dialogue with institutional shareholders on performance, plans and objectives through a programme of regular meetings.
The Group’s Investor Relations department, with offices in London and Philadelphia, acts as a focal point for contact with investors throughout the year.
The Chairman meets regularly with institutional investors to hear their views and discuss issues of mutual importance.
The Chairman of the Remuneration Committee meets annually with major shareholders to discuss executive remuneration policy.
All Non-Executive Directors, including new appointees, are available to meet with major shareholders if requested.
The company’s website provides access to current financial and business information about the Group.
Share capital and controlDetails of the company’s authorised and issued share capital and the number of shares held in Treasury, as at 31st December 2007, can be found in Note 33 to the financial statements, ‘Share capital and share premium account’. GSK’s shares are listed on the London Stock Exchange and are also quoted on the New York Stock Exchange in the form of American Depositary shares (ADSs). Each ADS represents two Ordinary shares.
The holders of Ordinary shares are entitled to receive dividends, when declared, the company’s reports and accounts, to attend and speak at General Meetings of the company, to appoint proxies and to exercise voting rights.
There are no restrictions on transfer, or limitations on the holding of Ordinary shares and no requirements to obtain prior approval to any transfers. NoOrdinary shares carry any special rights with regard to control of the company and there are no restrictions on voting rights. Major shareholders have the same voting rights per share as all other shareholders. There are no known arrangements under which financial rights are held by a person other than the holder of the shares and no known agreements on restrictions on share transfers or on voting rights.
Shares acquired through GSK share schemes and plans rank equally with the other shares in issue and have no special rights. The trustees of the company’s Employee Share Ownership Plan (ESOP) trusts have waived their rights to dividends on shares held by the ESOP trusts.
Change of controlThe company does not have agreements with any Director or Officer that would provide compensation for loss of office or employment resulting from a takeover, except that provisions of the company’s share plans may cause options and awards granted under such plans to vest on a takeover.
Interests in voting rightsAt 22nd February 2008, the company had received notifications in accordance with the FSA’s DTRs of the following notifiable interests, in the voting rights in the company’s issued share capital:
| No. of | Percentage of issued | |||
| shares | capital (%) | * | ||
| Legal & General Management | ||||
| Limited | 289,799,780 | 5.29 | ||
| Barclays PLC | 199,225,616 | 3.63 | ||
| * | Percentage of Ordinary shares in issue, excluding Treasury shares as at 22nd February 2008. |
The Bank of New York Mellon is the Depositary for the company’s ADRs, which are listed on the New York Stock Exchange. Ordinary shares representing the company’s ADR program, which are managed by the Depositary, are registered in the name of BNY (Nominees) Limited. Details of the number of Ordinary shares held by the Depositary can be found on page 170.
The company has not acquired or disposed of any interests in its own shares, other than in connection with the company’s share buy-back programme. Details of the shares purchased, cancelled and held in Treasury are disclosed in Note 33 to the financial statements, ‘Share capital and share premium account’.
| 64 | GSK Annual Report 2007 |
| REPORT OF THE DIRECTORS | |
| Corporate governance | |
| Corporate governance | |
| continued | |
Directors and Officers
The interests of Directors and Officers and their connected persons in the issued share capital of the company are given in the Remuneration Report (pages 71 to 86).
The rules about the appointment and replacement of directors are contained in the company’s Articles of Association. The company’s Articles must be approved by shareholders in accordance with the legislation in force from time to time.
The Articles provide that directors may be appointed by an ordinary resolution of the members or by a resolution of the directors, provided that, in the latter instance, a director appointed in this way retires at the first AGM following his appointment.
The Articles also provide that at every AGM at least one third of the directors retire by rotation, and detail the circumstances in which and how they may be re-elected. The company’s members may remove a director by passing an ordinary resolution of which special notice has been given. A director may automatically cease to be a director if (i) a bankrupcy order is made against him, (ii) he makes an arrangement or composition with his creditors or applies for an interim order in connection with a voluntary arrangement, (iii) he is suffering from a mental disorder, (iv) he has missed directors’ meetings for a continuous period of six months without permission and the other directors resolve that he shall cease to be a director, (v) he is prohibited from being a director by law, (vi) he resigns, (vii) he offers to resign and the other directors accept that offer, or (viii) at least three other directors require him to resign.
The company’s articles may be amended by a special resolution of the members.
The powers of the directors are determined by UK authoritieslegislation and the company’s Memorandum and Articles of Association, available on GSK’s website. As provided in those Articles, the directors may exercise all the company’s powers provided that the Articles or applicable legislation do not stipulate that any such powers must be exercised by the members. The directors have been authorised to issue and allot Ordinary shares, pursuant to Articles 9-15 and have authority to make market purchases of shares pursuant to Article 8. The powers under Articles 8, and 10-13 are referred to shareholders at the AGM for renewal. Shareholders are also requested to renew the directors’ power to make market purchases of shares at each AGM. Any shares purchased may be cancelled or held as Treasury shares.
Share buy-back programme
The company has repurchased £11.6 billion of its own shares for cancellation or to be held as Treasury shares, of which £3.8 billion was spent in 2007.
In July 2007, a programme totalling £12 billion of share repurchases over two years commenced. The programme covers purchases by the company of shares for cancellation or to be held as Treasury shares, in accordance with the authority renewed by shareholders at the company’s AGM in 2007.
In May 2007, the company was authorised to purchase a maximum of 575 million shares. Details of shares purchased, those held as Treasury shares and those cancelled are disclosed in Note 33 to the financial statements ‘Share capital and share premium account’.
The exact amount and timing of future purchases, and the extent to which repurchased shares will be held as Treasury shares rather than being cancelled, will be determined by the company and is dependent on market conditions and other factors.
Donations to EU political organisations and EU political expenditure
At the AGM in May 2001, shareholders first authorised the company to make donations to EU political organisations and to incur EU political expenditure, under the provisions of the Political Parties, Elections and Referendums Act 2000, of up to £100,000 each year. This authority has since been renewed annually. Although the company does not make and does not intend to make such payments or donations to EU political parties, within the normal meaning of that expression, the definition in the legislation of ’EU Political Organisation’ is wide. It may extend to bodies, which the company and its subsidiaries might wish to support including those concerned with policy review, law reform, the representation of the business community and special interest groups, such as those concerned with the environment. No donations were made to EU political organisations during 2007. The Group made donations to non-EU political organisations totalling £276,000 during 2007 (£319,000 in 2006).
Donations of £249,000 (£290,000 in 2006) were made in the USA, £27,000 (£27,000 in 2006) in Canada and £nil (£2,000 in 2006) in Australia. The USA is the largest recipient of political donations, and this reflects the US political system, where candidates are sponsored solely by donations from individuals, NGOs, companies and other parties.
In line with US law, the corporate donations by GSK are not made at a federal level, but only to candidates and political parties at the state and local levels. Donations are accepted practice in the USA, and as a major employer in a heavily regulated industry, it is important for GSK to engage fully in the political process. Donations are one of the ways of doing this. GSK supports those candidates who seek an environment that appropriately rewards high-risk, high-investment industries and who believe in free market principles and intellectual property rights.
The situation is similar in Canada, and donations follow the same guidelines. In the rest of the world donations are very rare and of low value.
There is also a GSK Political Action Committee (PAC) in the USA which gives political donations. PAC’s are employee organisations which allow employees to contribute to a fund for political donations. Employees decide upon the recipients of the PAC donations. In 2007, a total of £522,172 (£735,600 in 2006) was donated to political organisations by the GSK PAC.
The AGM will be held at 2.30pm on Wednesday, 21st May 2008 at The Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE. The business to be transacted at the meeting will include:
| • | Receiving and adopting GlaxoSmithKline’s 2007 Annual Report |
| • | Approving the 2007 Remuneration Report |
The Remuneration Report on pages 71 to 86 sets out the remuneration policies operated by GlaxoSmithKline and disclosures on Directors’ remuneration, including those required by the Companies Act 2006 and the Directors’ Remuneration Report Regulations 2002. A resolution will be proposed to approve the Remuneration Report. |
| GSK Annual Report 2007 | 65 |
| REPORT OF THE DIRECTORS | |
| Corporate governance | |
| Corporate governance | |
| continued | |
| • | Retirement, election and re-election of Directors | |
| Mr Witty, Mr Viehbacher and Professor Sir Roy Anderson have been appointed Directors since the 2007 AGM and will offer themselves for election to the Board. Sir Christopher Gent, Sir Ian Prosser and Dr Schmitz will each retire and offer themselves for re-election to the Board under article 93 of the company’s Articles of Association. Dr Garnier will also be retiring by rotation but will not be seeking re-appointment as he will be retiring from the Board after the conclusion of the AGM. | ||
| • | Re-appointment and remuneration of Auditors | |
| Resolutions will be proposed to re-appoint PricewaterhouseCoopers LLP as auditors and to authorise the Audit Committee to determine their remuneration. | ||
| • | Special business | |
| The company will seek authority to: | ||
| • | make donations to EU political organisations and incur EU political expenditure, each capped at £50,000 | |
| • | allot Ordinary Shares in the company | |
| • | give the Directors authority to disapply pre-emption rights when allotting new Shares in connection with rights issues or otherwise up to a maximum of 5% of the current issued share capital and purchase its own Ordinary Shares up to a maximum of just under 10% of the current issued share capital | |
| • | adopt new Articles of Association to reflect the changes introduced by the new Companies Act 2006. | |
Shareholders are entitled to appoint one or more proxies to attend the AGM, and to speak and vote on their behalf.
Details on how to appoint or be appointed a corporate representative or proxy can be found on page 171. The Notice of AGM will be published on the company’s website.
The Board recognises its responsibility to present a balanced and understandable assessment of the Group’s position and prospects. The structure of accountability and audit operated in GSK is as follows.
The Board has accountability for reviewing and approving the adequacy and effectiveness of internal controls operated by the Group, including financial, operational and compliance controls and risk management. The Board has delegated responsibility for such review to the Audit Committee, which receives reports from those individuals identified in the Committee’s Report on pages 67 to 69. It is the responsibility of management, through the CET, to implement Board policies on risk and control. The CET is responsible for identifying, approving, monitoring and enforcing key policies that go to the heart of how the Group conducts business. The internal control framework includes central direction, resource allocation and risk management of the key activities of research and development, manufacturing, marketing and sales, legal, human resources, information systems and financial practice. As part of this framework, there is a comprehensive planning system with an annual budget approved by the Board. The results of operating units are reported monthly and compared with the budget. Forecasts are prepared regularly during the year.
Extensive financial controls, procedures, self-assessment exercises and risk activities are reviewed by the Group’s internal auditors. Commercial and financial responsibility, however, is clearly delegated to local business units, supported by a regional management structure. These principles are designed to provide an environment of central leadership coupled with local operating autonomy as the framework for the exercise of accountability and control within the Group.
The Group also attaches importance to clear principles and procedures designed to achieve appropriate accountability and control. A Group policy, ‘Risk Management and Legal Compliance’, mandates that business units establish processes for managing and monitoring risks significant to their businesses and the Group.
The internal control framework also relies on the following for overseeing and reporting risk and compliance issues.
Risk Oversight and Compliance Council (ROCC)
The ROCC is a council of senior executives authorised by the Board to assist the Audit Committee oversee the risk management and internal control activities of the Group. Membership comprises several CET members and some of the heads of departments with internal control, risk management, audit and compliance responsibilities.
The ROCC meets on a regular basis to review and assess significant risks and their mitigation plans and provide oversight of internal controls to ensure compliance with applicable laws, regulations and internal GSK policies. The ROCC, responding to the Group policy referred to above, has provided the business units with a framework for risk management and upward reporting of significant risks. Mitigation planning and identification of a manager with overall responsibility for management of any given risk is a requirement.
Risk Management and Compliance Boards (RMCBs)
Risk Management and Compliance Boards (RMCBs) have been established in each of the major business units. Membership often comprises members of the senior executive team of the respective business unit, augmented by specialists where appropriate. The RMCBs oversee management of all risks that are considered important for their respective business units, including those risks that are designated as significant to GlaxoSmithKline as a whole, thus increasing the number of risks that are actively managed across the Group.
Each RMCB regularly reports the status regarding its significant risks to the ROCC.
Compliance functions
In a number of risk areas, specific standards that meet or exceed requirements of applicable law have been established. Specialist audit and compliance functions (for example: Corporate Environment, Health & Safety, Global Quality Assurance and Worldwide Regulatory Compliance) assist in the dissemination, implementation and audit of these standards.
Corporate Ethics & Compliance (CEC)
The ROCC is also supported by the Corporate Ethics & Compliance department which is responsible for supporting the development and implementation of practices that facilitate employees’ compliance with laws and Group policy.
The thrust of the Group’s compliance effort is due diligence in preventing and detecting misconduct or non-compliance with law or regulation by promoting ethical behaviour, compliance with all laws and regulations, corporate responsibility at all levels and effective compliance systems.
| 66 | GSK Annual Report 2007 |
| REPORT OF THE DIRECTORS | |
| Corporate governance | |
| Corporate governance | |
| continued | |
The CEC is managed by the Corporate Compliance Officer, who reports directly to the CEO. The Corporate Compliance Officer chairs the ROCC and provides summary reports on the ROCC’s activities and the Group’s significant risks to the CET and the Audit Committee on a regular basis. The Corporate Compliance Officer’s direct reporting line to the Audit Committee provides a mechanism for bypassing the executive management should the need ever arise.
Areas of potentially significant risk
For details of risks affecting the Group, see ‘Risk factors’ on pages 50 to 53 and Note 44 to the financial statements, ‘Legal proceedings’.
Effectiveness of controls
The internal control framework has been in operation for the whole of the year under review and continues to operate up to the date of approval of this report. The system of internal controls is designed to manage rather than eliminate the risk of not achieving business objectives, and can only provide reasonable and not absolute assurance against material misstatement or loss.
The Audit Committee receives reports on areas of significant risk to the Group and on related internal controls. Following consideration of these reports, the Audit Committee reports annually to the Board on the effectiveness of controls. Such controls may mitigate but cannot eliminate risks. In addition, there are areas of the Group’s business where it is necessary to take risks to achieve a satisfactory return for shareholders, such as investment in R&D and in acquiring new products or businesses.
In these cases, it is the Group’s objective to apply its expertise in the prudent management rather than elimination of risk. The Directors’ review relates to the company and its subsidiaries and does not extend to material associated undertakings, joint ventures or other investments.
The Board, through the Audit Committee, has reviewed the assessment of risks and the internal control framework that operates in GlaxoSmithKline and has considered the effectiveness of the system of internal control in operation in the Group for the year covered by this report and up to the date of its approval by the Board. The process followed by the Board in reviewing the system of internal controls accords with the guidance on internal control issued by the Turnbull Committee.
Audit Committee Report
The Audit Committee’s role flows directly from the Board’s oversight function and it is authorised by the Board to investigate any activity within its terms of reference. The Committee has written terms of reference which have been approved by the Board. The Committee reports regularly to the Board on the performance of the activities it has been assigned. The Committee’s main responsibilities include reviewing the corporate accounting and financial reporting process, monitoring the integrity of the financial statements, evaluating the system of internal control and the management of risks, overseeing activities of each of the Group’s compliance audit functions and overseeing compliance with laws, regulations and ethical codes of practice. The Committee’s oversight role requires it to address regularly the relationships between management and the internal and external auditors, and understand and monitor the reporting relationships and tiers of accountability between them.
The Committee receives regular reports from members of the CET and senior managers covering the key compliance activities of the Group, including those concerning R&D, manufacturing, sales and marketing and EHS.
Committee members, with the exception of Dr Podolsky, bring considerable financial and accounting experience to the Committee’s work. Members have past employment experience in either finance or accounting roles or comparable experience in corporate activities. Dr Podolsky’s background as a world-renowned researcher enables him to bring scientific expertise to the Committee’s deliberations.
Mr de Swaan joined the Board and the Committee with effect from 1st January 2006. He succeeded Dr Schmitz as Chairman of the Committee with effect from September 2006. When appointing Mr de Swaan to the Committee, the Board determined that he had recent and relevant financial experience, in accordance with the Combined Code. In coming to this conclusion, the Board paid particular attention to Mr de Swaan’s role as Chief Financial Officer of ABN AMRO, from which he retired on 31st December 2005. The Board also considers Mr de Swaan to be an Audit Committee Financial Expert, as defined by Sarbanes-Oxley.
Sir Deryck Maughan is a Managing Director of Kohlberg Kravis Roberts & Co (KKR) and Chairman of KKR Asia. He was Chairman and CEO of Citigroup International and Vice Chairman of Citigroup Inc. Prior to the creation of Citigroup, he was Chairman and Co-Chief Executive Officer of Salomon Smith Barney. He was also Chairman and Chief Executive Officer of Salomon Brothers Inc.
Sir Ian Prosser was CFO and later CEO of Bass plc and is a member of the Institute of Chartered Accountants in England and Wales.
Dr Schmitz was the Chairman of the Committee from April 2001 until September 2006. Prior to his appointment as a Non-Executive Director of the company, he was a Non-Executive Director of Glaxo Wellcome plc, where he served on the Audit Committee. Dr Schmitz has also been a member of the Executive Board of Directors of Deutsche Bank AG. He retired from the Board in 2000 having been in charge of investment banking. Dr Schmitz was formerly a member of the Executive Board of Directors of BASF from 1980 to 1990, including CFO from 1985 to 1990. He holds an MBA from Insead.
Sir Robert Wilson began his professional career as an economist. He is Chairman of BG Group plc. He held senior management positions at Rio Tinto plc culminating in his appointment as Executive Chairman, from which he retired in 2003.
Dr Podolsky was appointed to the Committee with effect from 1st January 2007. He is a world-renowned researcher who has advanced knowledge of underlying mechanisms of disease and new therapies for gastrointestinal disorders. He is Mallinkrodt Professor of Medicine and Chief of Gastroenterology at Massachusetts General Hospital and Harvard Medical School as well as Chief Academic Officer of Partners HealthCare system. His background enables him to bring scientific rather than financial or accounting expertise to the Committee’s deliberations.
The Committee is supported by the Company Secretary, who attends the Committee’s meetings and is also the Corporate Compliance Officer. It has available to it financial resources to take independent professional advice when considered necessary. Meetings of the Committee are attended by the Chairman, CEO, CFO, General Counsel, Head of Global Internal Audit (GIA) and the external auditors.
| GSK Annual Report 2007 | 67 |
| REPORT OF THE DIRECTORS | |
| Corporate governance | |
| Corporate governance | |
| continued | |
In 2007, the Committee worked to a structured programme of activities, with standing items that the Committee is required to consider at each meeting together with other matters focused to coincide with key events of the annual financial reporting cycle:
| • | the external auditors reported to the Committee on all critical accounting policies, significant judgements and practices used by the company, alternative accounting treatments which had been discussed with management and the resultant conclusion by the external auditors, material written communications with management and any restrictions on access to information |
| • | the CFO reported on the financial performance of the company and on technical financial and accounting matters |
| • | the General Counsel reported on material litigation |
| • | the Company Secretary and the Corporate Compliance Officer reported on corporate governance and on the activities undertaken by the ROCC |
| • | the Heads of each of the Group’s compliance and audit groups reported on their audit scope, annual coverage, audit resources and on the results of audits conducted throughout the year |
| • | the Company Secretary, as Chairman of the Disclosure Committee, reported on matters that affected the quality and timely disclosure of financial and other material information to the Board, to the public markets and to shareholders. This enabled the Committee to review the clarity and completeness of the disclosures in the published annual financial statements, interim reports, quarterly and preliminary results announcements and other formal announcements relating to financial performance prior to their release by the Board. |
The Audit Committee, management, internal auditors and the full Board work together to ensure the quality of the company’s corporate accounting and financial reporting. The Committee serves as the primary link between the Board and the external and internal auditors. This facilitates the necessary independence from management and encourages the external and internal auditors to communicate freely and regularly with the Committee. In 2007, the Committee met both collectively and separately with the external auditors and the Head of GIA, and the Corporate Compliance Officer without members of management being present.
The Committee has primary responsibility for making a recommendation to shareholders on the appointment, reappointment and removal of the external auditors by annually assessing the qualifications, expertise, resources and independence of the external auditors and the effectiveness of the audit process.
In making its assessment, the Committee considers papers which detail the relevant regulatory requirements relating to external auditors and evaluates reports from the external auditors on their compliance with the requirements. Where the external auditors provide non-audit services, the Committee ensures that auditor objectivity and independence are safeguarded by a policy requiring pre-approval by the Audit Committee for such services. These services may include audit services, audit-related services, tax services and other services. Pre-approval is detailed as to the particular service or categories of services, and is subject to a specific budget.
The external auditors and management report regularly to the Committee regarding the extent of services provided in accordance with this pre-approval and the fees for the services performed. The Committee may also pre-approve additional services on a case-by-case basis. Expenditure on audit and non-audit services is set out in Note 9 to the financial statements, ‘Operating profit’.
The guidelines set out in the company’s policy on engaging the external auditors to provide non-audit services include ascertaining that: the skills and experience of the external auditors make them a suitable supplier of the non-audit services; adequate safeguards are in place so that the objectivity and independence of the audit are not compromised; and the fee levels relative to the annual audit fee are within the limits set by the Committee.
The company also has well-established policies, including a Code of Ethics, which is available on its website, and a help-line facility for the reporting and investigation of unlawful conduct. No waivers to the Code were made in 2007.
The Committee met in full session six times in 2007 and five times on a quorate basis. Each full session was attended by all members except Sir Deryck Maughan, who was unable to attend one meeting.
Nominations Committee Report
The Nominations Committee’s terms of reference include responsibility for proposing the appointment of Board and Committee members. During 2007, the Committee’s main focus was on the selection of a new CEO to succeed Dr Garnier. Sir Robert Wilson, Mr de Swaan and Mr Culp attended the Committee’s meetings for the purpose of considering Dr Garnier’s successor. In implementing its process to select the new CEO, the Committee took external advice from an executive search company, which conducted a search to identify potential external candidates, in addition to the internal candidates already identified. A further executive search company was used to conduct a 360 degrees analysis of the candidates.
The Chairman conducted interviews with a number of key individuals both within and outside the company to gain their perspectives on the candidates. In addition, Dr Garnier provided the Committee with his analysis of the candidates.
After considering the Chairman and CEO’s feedback, the external advice and benchmarking, the Committee concluded by making a recommendation to the Board that Mr Witty should be appointed the Company’s next CEO.
The Committee also made recommendations to the Board on the appointment of Dr Burns as a Non-Executive Director, Professor Sir Roy Anderson as a Non-Executive Director and Scientific/Medical expert and the appointment of Mr Viehbacher as an Executive Director.
| 68 | GSK Annual Report 2007 |
| REPORT OF THE DIRECTORS | |
| Corporate governance | |
| Corporate governance | |
| continued | |
Following recommendations by the Committee, Dr Stephanie Burns was appointed as a Non-Executive Director in February 2007 and Professor Sir Roy Anderson in October 2007. Professor Sir Roy Anderson has been appointed as one of the Board’s Scientific/Medical experts.
When recruiting Non-Executive Directors, the Committee considers the particular skills, knowledge and experience that would benefit the Board most significantly for each appointment. Broad selection criteria are used which focus on achieving a balance between the representation of European, UK and US markets, and having individuals with CEO experience and skills developed in various sectors and specialities. During 2007, particular focus was placed upon recruiting a Non-Executive with scientific and medical expertise and a Non-Executive with CEO experience from the USA. Professional search agencies are engaged specialising in the recruitment of high calibre Non-Executive Directors. Dossiers of potential Non-Executive appointees are provided to the Committee and candidates are short-listed for interview after considering their relevant qualifications.
A customised induction process is conducted for each of the new Non-Executive Directors focusing on their particular experience and taking account of their different backgrounds. This process includes meeting members of the CET and other senior executives and visiting particular operational facilities of the Group.
When appointing new Executive Directors, and CET members, the Committee considers the skills, knowledge and experience required for the particular executive position. The Committee will consider potential external and internal candidates before recommending to the Board to approve the new appointment. All new Directors offer themselves for election at the company’s next AGM. Their appointments are announced publicly.
At the end of 2006 the Committee recommended the appointment of Dr Podolsky to the Audit Committee and the appointment of Sir Christopher Gent to the Remuneration Committee both with effect from 1st January 2007.
The Committee also recommended the appointment of Dr Burns to the Corporate Responsibility Committee in December 2007.
The Committee met three times during 2007. All members were present at the full meetings, except Dr Schmitz who was unable to attend one meeting.
Remuneration Report
The Remuneration Report can be found on pages 71 to 86.
Corporate Responsibility Committee Report
The main responsibilities of the Corporate Responsibility Committee are to review GSK’s policies and practices in anticipating and managing external issues that have the potential to impact seriously the Group’s business and reputation. The Committee has terms of reference, which have been approved by the Board and are published on the GSK’s website.
The Committee meets three times a year and has a rolling agenda that ensures that progress on meeting GSK’s Corporate Responsibility Principles is reviewed on an appropriate basis. Four Principles – access to medicines, standards of ethical conduct, research and innovation and global community partnerships – are reviewed annually. Other Principles are discussed at least once every two years. The Committee also reviews and approves the annual Corporate Responsibility Report. The Committee receives regular reports from the members of the CET and senior managers, which cover the key corporate responsibility areas for GSK.
The Committee members have been selected for the relevant expertise that they may contribute to the Committee’s activities. The Committee members are Sir Christopher Gent (Chairman), Dr Burns, Sir Ian Prosser, Dr Podolsky and Mr de Swaan. The Committee is supported by the Company Secretary, who attends the Committee’s meetings. The CEO, General Counsel, Senior Vice President of Corporate Communications and Community Partnerships and the Head of Corporate Responsibility also attend the meetings. The Chairman reports to the Board on the Committee’s activities.
During the year the Committee reviewed GSK’s activity in a number of responsibility areas including access to medicines, community partnerships, reputation management, human rights in the supply chain, efficiency of manufacturing processes, climate change, the risk management processes in R&D, transparency of clinical trial data, informed consent procedures for clinical trials, financial interactions with health care professionals, animal research and testing, ethics and compliance initiatives, policy violations and discipline, use of social media tools and employment practices.
The Committee met three times during 2007. Each meeting was attended by all Committee members.
GSK’s Corporate Responsibility Report can be accessed on the website.
Throughout 2007, the company complied with the Code provisions of the Combined Code, except as follows:
A number of provisions of US law and regulation apply to GSK because the company’s shares are quoted on the New York Stock Exchange (NYSE) in the form of ADSs.
NYSE rules
In general, the NYSE rules permit the company to follow UK corporate governance practices instead of those applied in the USA, provided that the company explains any significant variations. This explanation is on the company’s website. NYSE rules that came into effect in 2005 require the company to file annual and interim written affirmations concerning the Audit Committee and the company’s statement on significant differences in corporate governance.
Sarbanes-Oxley Act of 2002
Following a number of corporate and accounting scandals in the USA, Congress passed the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley). Sarbanes-Oxley is a wide ranging piece of legislation concerned largely with financial reporting and corporate governance.
As recommended by the Securities and Exchange Commission (SEC), GSK has established a Disclosure Committee. The Committee reports to the CEO, the CFO and to the Audit Committee. It is chaired by the Company Secretary and the members consist of senior managers from finance, legal, compliance, corporate communications and investor relations.
| GSK Annual Report 2007 | 69 |
| REPORT OF THE DIRECTORS | |
| Corporate governance | |
| Corporate governance | |
| continued | |
External legal counsel and the external auditors are invited to attend its meetings periodically. It has responsibility for considering the materiality of information and, on a timely basis, determining the disclosure of that information. It has responsibility for the timely filing of reports with the SEC and the formal review of the Annual Report and Form 20-F. In 2007, the Committee met nine times.
Sarbanes-Oxley requires that the Annual Report contains a statement as to whether a member of the company’s Audit Committee is an audit committee financial expert. For an explanation and details of the basis for the Board’s judgement on this matter, refer to page 67. Additional disclosure requirements arise under Section 302 and Section 404 in respect of disclosure controls and procedures, and internal control over financial reporting.
Section 302: Corporate responsibility for financial reports
Sarbanes-Oxley also introduced a requirement for the CEO and the CFO to complete formal certifications, confirming that:
| • | they have each reviewed the Annual Report and Form 20-F |
| • | based on their knowledge, it contains no material misstatements or omissions |
| • | based on their knowledge, the financial statements and other financial information fairly present, in all material respects, the financial condition, results of operations and cash flows as of the dates, and for the periods, presented in the Annual Report and Form 20-F |
| • | they are responsible for establishing and maintaining disclosure controls and procedures that ensure that material information is made known to them, have evaluated the effectiveness of these controls and procedures as at the year-end, the results of such evaluation being contained in the Annual Report and Form 20-F |
| • | they are responsible for establishing and maintaining internal control over financial reporting that provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles |
| • | they have disclosed in the Annual Report and Form 20-F any changes in internal controls over financial reporting during the period covered by the Annual Report and Form 20-F that have materially affected, or are reasonably likely to affect materially, the company’s internal control over financial reporting |
| • | they have disclosed, based on their most recent evaluation of internal control over financial reporting, to the external auditors and the Audit Committee, all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to affect adversely the company’s ability to record, process, summarise and report financial information and any fraud (regardless of materiality) involving persons that have a significant role in the company’s internal control over financial reporting. |
The Group has carried out an evaluation under the supervision and with the participation of the Group’s management, including the CEO and CFO, of the effectiveness of the design and operation of the Group’s disclosure controls and procedures as at 31st December 2007.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon the Group’s evaluation, the CEO and CFO have concluded that, as at 31st December 2007, the disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports the Group files and submits under the US Securities Exchange Act of 1934, as amended, is recorded, processed, summarised and reported as and when required and that it is accumulated and communicated to management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
The CEO and CFO completed these certifications on 29th February 2008.
Section 404: Management’s annual report on internal control over financial reporting
In accordance with the requirements of section 404 of Sarbanes-Oxley, the following report is provided by management in respect of the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the US Securities Exchange Act of 1934):
| • | Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Group. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS |
| • | Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework inInternal Control – Integrated Frameworkissued by the Committee of Sponsoring Organisations of the Treadway Commission |
| • | Management has assessed the effectiveness of internal control over financial reporting, as at 31st December 2007 and has concluded that such internal control over financial reporting was effective. In addition, there have been no changes in the Group's internal control over financial reporting during 2007 that have materially affected, or are reasonably likely to affect materially, the Group's internal control over financial reporting. |
| • | PricewaterhouseCoopers LLP, which has audited the consolidated financial statements of the Group for the year ended 31st December 2007, has also assessed the effectiveness of the Group’s internal control over financial reporting under Auditing Standard No. 5 of the Public Company Accounting Oversight Board (United States). Their audit report may be found on page 89. |
| 70 | GSK Annual Report 2007 |
| REPORT OF THE DIRECTORS | |
| Remuneration Report | |
| Remuneration Report | |
The Remuneration Report sets out the remuneration policies operated by GSK in respect of the Directors and Corporate Executive Team (CET) members, together with disclosures on Directors’ remuneration including those required by The Directors’ Remuneration Report Regulations 2002 (the Regulations).
This Report is submitted to shareholders by the Board for approval at the Annual General Meeting, as referenced in the Notice of Annual General Meeting.
Throughout the Remuneration Report the Executive Directors and CET members are referred to as the ‘Executives’.
References to GlaxoSmithKline shares and ADSs mean, respectively, Ordinary Shares of GlaxoSmithKline plc of 25p and American Depository Shares of GlaxoSmithKline plc. Each ADS represents two GlaxoSmithKline shares.
| GSK Annual Report 2007 | 71 |
| REPORT OF THE DIRECTORS | |
| Remuneration Report | |
| Remuneration Report | |
The Remuneration Committee (or Committee) is responsible for making recommendations to the Board on the company’s remuneration policy and, within the terms of the double tax convention betweenagreed policy, determining the two countriestotal individual remuneration packages of the Executives.
GlaxoSmithKline’s remuneration policy is designed to establish a framework for remuneration that is consistent with the company’s scale and discussions were terminated in July 2003. On 6th January 2004,scope of operations, meets the IRS issued a Noticerecruitment needs of Deficiency for the years 1989-1996 claiming additional taxes of $2.7 billion. On 2nd April 2004 the Group filed a petition in the US Tax Court disputing the IRS claimbusiness and seeking a refund of $1 billion in taxes. On 25th January 2005 the IRS issued a further Notice of Deficiency for the years 1997-2000 claiming additional taxes of $1.9 billion. If the IRS claims for the years 1989-2000 were upheld, the Group would additionally be liable for interest on late payment, estimated to amount to $3.0 billion net of federal tax reliefis closely aligned with UK shareholder guidelines. As at 31st December 2004, giving2007, the company was the second largest pharmaceutical company in the world by revenue, with operations on five continents with products sold in over 140 countries and with approximately 50% of sales being generated in the USA.
The appropriateness of GSK’s remuneration policy is kept under review by the Remuneration Committee and, as part of this ongoing commitment, the Committee has commenced a process to reassess the remuneration policy to ensure that it continues to support the future direction of the business. The company has announced the appointment of its new CEO, effective May 2008. A dialogue has begun, with the purpose of reviewing the alignment of the remuneration structure with the new business priorities set by the new CEO. This may lead to changes being considered over the coming year. The Chairman of the Committee continues to have regular dialogue with institutional investors regarding GSK’s remuneration policy and any material changes to the policy will be discussed with major shareholders and disclosed in the 2008 Remuneration Report. The remainder of this report sets out GSK’s current remuneration policy.
Remuneration Committee
Sir Robert Wilson has been Chairman of the Committee since 17th May 2004. Sir Crispin Davis, Mr Culp, Sir Christopher Gent and Dr Schmitz were members of the Committee throughout 2007. The Board deemed all of the members of the Committee to be independent Non-Executive Directors in accordance with the Combined Code with the exception of the Chairman of the company Sir Christopher Gent, who was independent on appointment to the company.
The Committee met four times during 2007 with each member attending as follows:
| Number of meetings | Number of meetings | |||
| held whilst a | attended by | |||
| Name | Committee member | Committee member | ||
| Sir Robert Wilson | 4 | 4 | ||
| Mr L Culp | 4 | 4 | ||
| Sir Crispin Davis | 4 | 4 | ||
| Sir Christopher Gent | 4 | 4 | ||
| Dr R Schmitz | 4 | 4 | ||
At these meetings, amongst other items, the Committee considered the terms of service and remuneration levels for new Executive appointments and the competitiveness of the company’s total reward package, including the level of $7.6 billionannual and long-term incentive opportunity.
The policy aspects were discussed by the Chairman and the Chairman of the Committee at their annual meetings with institutional investors.
Two quorate meetings were held during the year to approve the formal grant of share options and performance share awards in accordance with GSK remuneration policy.
With the exception of Mr Bicknell (Company Secretary), no employees of the company were involved in the conduct of Committee meetings. Dr Garnier (CEO) and Mr Phelan (Senior Vice President, Human Resources), were invited to attend part of some meetings of the Committee as required.
Deloitte & Touche LLP (Deloitte) has been appointed by the Committee to provide it with independent advice on executive remuneration.
Deloitte provided other consulting services to GSK during the year, but did not provide advice on executive remuneration matters other than to the Committee.
Towers Perrin provided market data and data analysis to the Committee.
Principles
The remuneration policy for GSK is designed to secure outstanding executive talent, and to provide pay for performance and only for performance, within a transparent and robust governance structure.
The Committee determined that GSK’s remuneration policy would be based on the following key principles:
| • | the remuneration structure must support the needs of the business in a very competitive market place | |
| • | UK shareholder guidelines will be followed to the maximum extent consistent with the needs of the business and the company would maintain a regular dialogue with shareholders | |
| • | global pharmaceutical companies are the primary pay comparator group | |
| • | performance conditions would be based on the measurable delivery of strong financial performance and the delivery of superior returns to shareholders as compared with other pharmaceutical companies | |
| • | a high proportion of the total remuneration opportunity will be based on performance-related remuneration which will be delivered over the medium to long term | |
| • | remuneration would be determined using the projected value method (see ‘Benchmarking’ below) | |
| • | there would be one remuneration structure for Executive Directors and the CET with the same performance conditions applying equally to their long-term incentive awards | |
| • | no ex-gratia payments will be made | |
| • | pay structures would be as simple as is consistent with the business needs. |
Overall, the policy is intended to provide median total remuneration for median performance, with the opportunity to earn upper quartile total remuneration for exceptional performance. Poor performance will result in total remuneration significantly below the pay comparator group median.
This strong alignment with performance is demonstrably in the interests of shareholders and provides the Executives with unambiguous signals about the importance of delivering success to the company’s shareholders.
| 72 | GSK Annual Report 2007 |
| REPORT OF THE DIRECTORS | |
| Remuneration Report | |
| Remuneration Report | |
| continued | |
Commitment
The Committee will apply this policy in a consistent and transparent way. Any significant changes in the measures used to assess performance will be discussed with shareholders. In the use of comparators for pay benchmarking, the Committee will use its discretion to ensure that remuneration levels are reasonable, and if it believes that changes may cause concern amongst shareholders, the position will be discussed with shareholders prior to implementation.
Pay and performance comparators
The following table sets out the companies used for pay and performance comparison:
| Market | ||||
| Capitalisation | ||||
| Company | Country | 31.12.07 | ||
| £m | ||||
| Abbott Laboratories | USA | 45,822 | ||
| Amgen | USA | 25,322 | ||
| AstraZeneca | UK | 32,549 | ||
| Bristol-Myers Squibb | USA | 26,486 | ||
| Eli Lilly | USA | 31,955 | ||
| GlaxoSmithKline | UK | 70,452 | ||
| Johnson & Johnson | USA | 96,264 | ||
| Merck | USA | 63,509 | ||
| Novartis | Switzerland | 74,112 | ||
| Pfizer | USA | 80,550 | ||
| Roche Holdings | Switzerland | 63,543 | ||
| Sanofi-Aventis | France | 65,724 | ||
| Schering-Plough | USA | 21,854 | ||
| Takeda Pharmaceutical Company* | Japan | 25,196 | ||
| Wyeth | USA | 31,944 | ||
| * only included for performance comparison. | ||||
Benchmarking
For benchmarking purposes, total remuneration incorporates base salary, annual bonus and long-term incentives. When setting pay, the Committee also has due regard to the Executives’ pension arrangements.
The global pharmaceutical industry is used as the primary pay comparator for Executives, as it is the appropriate marketplace for the company’s most senior executive talent.
In the first instance, pay is benchmarked to publicly available remuneration data for these companies. To provide additional context reference is also made to the Towers Perrin annual global pharmaceutical pay survey for the Pharmaceutical Human Resources Association (PHRA). To ensure that the global pharmaceutical industry benchmark is subject to scrutiny and review, the Committee also regularly considers pay data from other global businesses primarily in the consumer and the manufacturing sectors.
Prior to determining the annual long-term incentive opportunity, the Committee considers a range of payout levels that may be achieved based on different assumptions, such as share price growth, performance levels etc.
For performance in line with expectations, total remuneration is targeted at the median of the pay comparator group and the long-term incentive opportunity is set in a way which provides for positioning of total remuneration at the median of this group.
Valuation method
The projected value method is used to benchmark total remuneration. This method projects the future value of the remuneration package under different performance scenarios. This method, taken together with an assessment of the pay comparator group’s incentive policies over several years, 1989-2000. moderates the impact of market fluctuations in the short term and strengthens the focus on performance.
The Committee uses the projected value method for pay benchmarking purposes as it enables a comparison of packages with different structural characteristics and provides an insight into the value gearing of different equity instruments.
Individual elements of remuneration
The balance between the fixed (base salary) and variable (annual bonus and long-term incentive) elements of remuneration changes with performance. The chart below shows the anticipated normal range of the mix between fixed and variable pay at different levels of performance for Mr Heslop and Dr Slaoui. In some years, the ranges may be higher or lower, depending on the performance of the company and the individual.
Base salary
Base salaries are set by reference to the median for the relevant market. For Executives, this is the pharmaceutical pay comparator group. Actual salary levels are reviewed annually and are influenced by an Executive’s experience, responsibility and market value. Any changes usually take effect from 1st April.
The table below sets out current base salaries and those that will take effect in April 2008.
| Base salary from | Percentage | Base salary from | |||||
| 1st April 2007 | increase | 1st April 2008 | |||||
| Dr JP Garnier* | $1,834,000 | – | $1,834,000 | ||||
| Mr J Heslop** | £450,000 | 7.8 | % | £485,000 | |||
| Dr M Slaoui** | $725,000 | 13.8 | % | $825,000 | |||
| * | Dr Garnier will retire from the Board on 21st May 2008. |
| ** | These base salary increases reflect the Committee’s assessment of performance in their respective roles since appointment. |
Mr Witty and Mr Viehbacher were both appointed to the Board with effect from 31st January 2008. Their salaries at that time were £550,000 and $800,000 respectively.
| GSK Annual Report 2007 | 73 |
| REPORT OF THE DIRECTORS | |
| Remuneration Report | |
| Business review | |
| Remuneration Report | |
| continued | |
Annual bonus
All annual cash bonuses are determined on the basis of a formal review of annual performance against stretching financial targets based on profit before interest and tax and are subject to detailed assessment of individual, business unit and Group expectsachievements against objectives. No bonus is payable if financial performance is less than 96% of the target. The maximum annual cash bonus that Executives can earn based solely on corporate performance is approximately two-thirds of the maximum bonus opportunity. The individual performance against objectives can increase or decrease the bonus level by a factor which can range from zero to file a petition1.5. Bonuses are subject to upper limits which, for the Executives other than the CEO, range between 100% and 200% of base salary. The CEO’s maximum bonus opportunity is 200%.
The aim of the remuneration policy is to deliver annual cash remuneration in line with the median of the pay comparator group for on-target business performance.
In the case of the CEO, the bonus targets are set by the Board. In setting the objectives for the CEO, the Board takes into account the strategies that have been developed by the company, which are set out on page 10 of the Annual Report.
For reasons of commercial sensitivity, the specific objectives set against the strategic business drivers, as set out on page 10, are kept confidential. Following the end of the financial year, the Board reviews the CEO’s performance generally and against the set objectives, and the Committee then determines the bonus payable. For the other Executives, the CEO makes recommendations to the Committee regarding the performance level achieved against objectives. These recommendations are then considered by the Committee to determine the resultant bonus.
The objectives set for 2007 focused in particular on the continued development and launch of late-stage pipeline assets, delivery of commercial plans and acceleration of operational excellence programmes.
Bonus measures for R&D employees, including Dr Slaoui, are linked to the pipeline. A robust governance structure has been established to ensure that the bonus payable fairly reflects R&D productivity and performance as well as profit targets. The Committee reviewed the new arrangements following the first year of implementation and agreed that it should continue as established.
The Committee took into account the company’s success in achieving the above objectives, as well as individual Executives’ performance, when determining the bonus awards for 2007.
Looking forward, in order to drive the necessary changes through the business, the Committee may set additional targets with associated bonuses for the achievement of specific operational goals. Any incremental bonus will be in the form of GSK shares deferred for a period and will not exceed 100% of salary.
Long-term incentives
Executives are eligible for annual long-term incentive (LTI) awards, and the remuneration policy provides that these will normally be made up of a performance share award and a share option award.
The Committee considers that performance shares provide a stronger alignment to shareholder interests, and therefore the remuneration policy places greater emphasis on the use of performance shares. LTI awards are determined such that for on-target performance more than half of the LTI reward should be derived from performance shares.
The annual grant of LTI awards using more than one plan is consistent with the practice of the pay comparator group and other leading UK companies. LTI awards for the CET are provided on the same basis as the Executive Directors. The level of the annual LTI opportunity is considered carefully year-on-year by the Committee in the context of market practice and GSK’s policy on market positioning. The performance period starts on 1st January of the year of award (i.e. 1st January 2008 for awards made in February 2008).
Performance shares and share options are delivered to US resident executives in the form of ADSs. Awards are delivered in the form of Ordinary Shares to executives resident in the UK and other countries. All awards are made under plans which incorporate dilution limits consistent with the guidelines provided by the Association of British Insurers, the National Association of Pension Funds and other shareholder representative bodies. Current estimated dilution from existing awards under all GSK employee share schemes made since the merger is approximately 6.4% of the company’s share capital at 31st December 2007.
a) Performance shares
For the Executives, the level of performance shares vesting is based on the company’s Total Shareholder Return (TSR) relative to the performance comparator group (see page 73) over a three-year measurement period. TSR was chosen as the most appropriate comparative measure since it focuses on the return to shareholders, is a well-understood and tested mechanism to measure performance and allows comparison between companies operating in different countries.
TSR is measured in Sterling over the performance period and represents the change in the value of a share together with the value of reinvested dividends paid. In order to remove the impact of the varying tax claimstreatments of dividends in different jurisdictions, all dividends are reinvested gross.
The table below sets out the performance share awards made in February 2008, for 1997-2000which full disclosure will be made in April 2005, includingthe 2008 Remuneration Report.
| Executive Director | Performance share award | Market price on | ||
| Dr JP Garnier* | – | – | ||
| Mr A Witty | 225,000 shares | £11.47 | ||
| Mr J Heslop | 105,000 shares | £11.47 | ||
| Dr M Slaoui | 69,000 ADSs | $44.75 | ||
| Mr C Viehbacher | 42,500 ADSs | $44.75 | ||
| * | Dr Garnier will retire from the Board on 21st May 2008. |
If GSK is ranked at the median of the performance comparator group, 35% of the shares will vest. Any ranking below this point will result in no shares vesting. Only if GSK is one of the top two companies will all of the shares vest. When determining vesting levels, the Committee has regard for the company’s underlying financial performance.
| 74 | GSK Annual Report 2007 |
| REPORT OF THE DIRECTORS | |
| Remuneration Report | |
| Business review | |
| Remuneration Report | |
| continued | |
The graph below sets out the vesting schedule for the awards made to the Executives in 2008 based on a performance comparator group comprising 14 companies excluding GSK. Where GSK’s TSR performance falls between two companies vesting increases on a straight-line basis.
To provide a closer link between shareholder returns and payments to the Executives, notional dividends are reinvested and paid out in proportion to the vesting of the award. The receipt of dividends has been incorporated into the benchmarking of award levels. In addition, performance shares earned by the Executives cannot be sold, except to meet related tax liabilities, for a further claim for refundtwo years following the end of taxes,the performance period.
The Performance Share Plan awards granted to the Executive Directors (excluding Dr Slaoui) in December 2004, with the performance period starting on 1st January 2005 and will askending on 31st December 2007 vested in part (38.47%) because GSK’s relative TSR performance placed the Tax Courtcompany above the median of the comparator group.
The awards made to consolidateother senior executives in 2004, including Dr Slaoui, were dependent in part on TSR performance and in part on EPS performance. The TSR portion vested in part and the IRS claims for all the years 1989-2000 into a single trial. A provisional trial dateEPS portion vested in full.
The vesting tables for the 1989-1996 claims has been setperformance share awards granted in 2004, 2006, 2007 and 2008 are given on page 84.
b) Share options
Share options allow a holder to buy shares at a future date at the share price prevailing at the time of grant. Share options are granted to more than 12,000 managers at GSK, including the Executives. The vesting of the share options granted to the Executives is linked to the achievement of compound annual EPS growth over the performance period. EPS is measured at constant exchange rates (CER) as it is GSK’s practice to measure performance on a CER basis.
The Committee considers that EPS is the key measure of the performance of the business and is fully reflected through the business measures extended throughout the Group, ensuring organisational alignment.
When setting EPS targets the Committee considers, prior to each grant, the company’s internal projections and analysts’ forecasts for October 2006. As similar tax issues remain openGSK’s EPS performance, as well as analysts’ forecasts for 2001 to date, GlaxoSmithKline expects to receive further substantial claims by the IRS for these years. GlaxoSmithKline continues to believepharmaceutical industry.
After extensive and careful consideration, the Committee agreed that the profits reported by its US subsidiariesannualised growth in EPS to achieve 100% vesting for the share option awards granted in February 2008 would be RPI + 6%. The following key principles govern the use of EPS as a performance measure:
| • | adjustments will only be considered for major items |
| • | adjustments will be for the judgement of the Committee |
| • | the purpose of the adjustments is to ensure that the performance measurement is fair and reasonable to both participants and shareholders |
| • | any discretion exercised by the Committee will be disclosed to shareholders in the Annual Report. |
The Committee will set out the basis of its decision if it considers it appropriate to make any significant adjustment.
The table below sets out the share option awards made in February 2008, for which full disclosure will be made in the 2008 Remuneration Report.
| Executive Director | Share option award | Option price | ||
| Dr JP Garnier* | – | – | ||
| Mr A Witty | 525,000 shares | £11.47 | ||
| Mr J Heslop | 242,750 shares | £11.47 | ||
| Dr M Slaoui | 158,750 ADSs | $44.75 | ||
| Mr C Viehbacher | 97,750 ADSs | $44.75 | ||
| * | Dr Garnier will retire from the Board on 21st May 2008. |
For share options granted to the Executives in 2008, vesting increases on a straight-line basis for EPS performance between the hurdles set out in the following graph.
| GSK Annual Report 2007 | 75 |
| REPORT OF THE DIRECTORS | |
| Remuneration Report | |
| Business review | |
| Remuneration Report | |
| continued | |
This performance condition is substantially consistent with UK shareholder guidelines and expectations and is demanding when compared with those operated by other global pharmaceutical companies. This is consistent with the policy of providing pay for performance and only for performance.
Performance is measured over a period 1989of three financial years. The performance period starts in the year of award with the base year being the preceding financial year. There is no performance retesting, so if the performance condition is not met after the three-year period the options will lapse.
The share options granted in 2004 vested in full.
Pensions
The Executives participate in GlaxoSmithKline senior executive pension plans. The pension arrangements are structured in accordance with the plans operated for executives in the country in which the executives are likely to date,retire. Details of individual arrangements for the Executive Directors are set out on page 85. In response to the new pensions regime in the UK, the Committee carefully considered the impact of the change in legislation and decided the following:
| • | the company will continue to fulfil its obligations under existing pension arrangements |
| • | no compensation will be provided if participants are adversely affected by the new pension regime. |
| The GSK pension policy for executives in the UK is: | |
| • | newly employed executives benefit from a company contribution of 15% of base pay under the defined contribution plan together with the opportunity to receive up to a further 4% in matched contributions |
| • | legacy final salary plans which provide for two-thirds of final salary at age 60 were grandfathered for existing employees and no new entrants have been allowed |
| • | for capped employees, benefits in excess of the cap are currently all provided through unfunded arrangements |
| • | under the legacy final salary plans, actuarial reduction factors apply where a participant leaves employment of his own accord before the age of 60, effectively spreading the value of the pension earned over a longer life expectancy. If employment is terminated by the company (e.g. redundancy) the reduction factors will not apply. |
In the USA, GSK operates a US Cash Balance Plan which it has paid taxesprovides for an annual contribution and interest on the sum accumulated in the cash balance plan but with no contractual promise to provide specific levels of retirement income.
With effect from 1st January 2006, the company introduced an executive Pension Credit within the US Cash Balance Plan for senior US executives. Contribution rates under the plan range from 15% to 38% of base salary. All senior US executives are eligible for the new executive Pension Credit, except for Dr Garnier, whose provisions were grandfathered in light of his anticipated retirement in 2008.
For capped employees in the USA, benefits above the cap are provided by an unfunded non-qualified plan.
Share ownership requirements
To align the interests of executives with those of shareholders, executives are required to build up significant holdings of shares in GlaxoSmithKline and maintain these. These requirements are an important part of aligning the interests of executives with shareholders. The CEO is required to acquire shares to the value of four times base salary within three years of appointment. Other Executive Directors are required to build a shareholding to the value of three times base salary. Members of the CET are required to build a shareholding to a value of two times base salary. The other top 700 executives in the Group are required to build a shareholding to the value of one times base salary and are required to confirm this holding which is audited by KPMG on an annual basis. Where individuals are recruited or promoted, the new shareholding requirement is expected to be met within three years.
For shares to qualify for these share ownership requirements they must be held personally by the Executive or their spouse (except where the spouse is also employed by GSK and is also subject to these requirements) or minor children or have been earned but deferred under one of the share programmes operated by the company. Unexercised share options are not included in this calculation.
As at 31st December 2007, Dr Garnier’s holding was 514,369 ADSs, Dr Slaoui’s was 20,699 ADSs and Mr Heslop’s was 41,529 ordinary shares. Dr Garnier’s holding was in excess of the share ownership requirements. Mr Heslop has until December 2008 and Dr Slaoui has until December 2009 to build their holdings to the value of three times base salary.
Executives are required to continue to satisfy these shareholding requirements for a minimum of twelve months following retirement from the company.
Other remuneration elements
The Executives participate in various legacy Glaxo Wellcome and SmithKline Beecham all-employee share plans in either the UK or the USA and in the GlaxoSmithKline plans that replaced them.
The Sharesave plan and the ShareReward plan are UK HM Revenue and Customs approved plans open to all UK employees on the same terms. Mr Witty and Mr Heslop are members of the Sharesave plan, into which they contribute £250 a month. This provides them with the option to buy shares at the end of the three-year savings period in line with the opportunity available to all UK employees.
Mr Witty and Mr Heslop also contribute £125 per month to buy shares under the ShareReward plan. The company matches the number of shares bought each month.
The Executives also receive other benefits including healthcare (medical and dental), personal financial advice and life assurance. The cash value of the benefits received by the Executive Directors in 2007 is shown on page 79.
On 19th February 2008, the company made a conditional award of 111,750 ADSs to Mr Viehbacher. The award will vest in two tranches, subject to his continued employment with GSK and the Committee’s assessment of his performance over the vesting period. 67,050 ADSs will vest on 31st December 2009 with the balance vesting on 31st December 2011.
The number of ADSs will be adjusted to reflect dividends that would have accrued in the period between award and vesting to the extent that the ADSs vest.
| 76 | GSK Annual Report 2007 |
| REPORT OF THE DIRECTORS | |
| Remuneration Report | |
| Remuneration Report | |
| continued | |
Executive Director terms, conditions and remuneration
Executive Director contracts
The policy set out below provides the framework for contracts for Executive Directors appointed since 2003.
| Aspect | Policy | |
| Notice period on termination by the employing companyor executive | 12 calendar months | |
| Termination payment | – | 1 x annual salary and |
| 1 x annual ‘on-target’ bonus1 | ||
| – | No mitigation required2 | |
| Vesting of long-termincentives | Rules of relevant equity incentiveplan3 | |
| Pension | Based on existing arrangements andterms of the relevant pension plan | |
| Non-compete clause | 12 months from terminationnotice date2 | |
| 1 | Dr Garnier’s target bonus is 100% of salary, Dr Slaoui’s is 85% of salary and Mr Heslop’s is 75% of salary. When reviewing the level of severance payments, the Committee considered investor and Department for Business Enterprise & Regulatory Reform guidance. However, it determined that in line with competitive practice it is appropriate to provide for the payment of salary and target bonus on termination. |
| 2 | The imposition of a 12-month non-compete period on the Executives is considered vitally important by the company in order to protect the Group’s intellectual property. In light of the non-compete clause and competitor practice, the Committee believes that it would not be appropriate to provide for mitigation in the contracts. |
| 3 | As approved by shareholders of GlaxoSmithKline, Glaxo Wellcome and SmithKline Beecham, as appropriate. |
In 2003, Dr Garnier agreed to changes to his previous contractual terms without compensation to come broadly in line with the new contractual framework, including the reduction of contractual notice period from 24 to 12 calendar months. However, in order to honour certain aspects of his previous contractual terms, there are a number of individual features which were retained.
The retained individual features include the entitlement to reimbursement of excise tax on change of control related payments and life insurance benefit funded by the company to age 65.
In relation to LTI awards, these are subject to performance testing, and any share options or performance share awards granted within 12 months of the termination notice date will lapse. However, on termination by the company (other than for cause), on retirement or on resignation for ‘good reason’ (i.e. resignation due to not being elected or retained as a director of the company or any merged company, or as a result of a change of control provided that such resignation occurs on or within 30 days of the first anniversary of the change in control) share options remain exercisable for the full option term.
In addition, except on retirement, Dr Garnier is entitled to receive one year’s worth of pension contributions on termination.
The terms of Dr Garnier’s retirement will be in accordance with his contractual entitlements.
The following table sets out the details of the Executive Directors’ service contracts:
| Current Directors | Date of contract | Effective date | Expiry date | |
| Dr JP Garnier* | 03.03.04 | 01.01.04 | 31.05.08 | |
| Mr A Witty | 27.02.08 | 31.01.08 | 31.08.24 | |
| Mr J Heslop | 16.03.05 | 01.04.05 | 31.01.14 | |
| Dr M Slaoui | 16.05.06 | 01.06.06 | 01.08.19 | |
| Mr C Viehbacher | 27.02.08 | 31.01.08 | 01.04.20 | |
| * | Dr Garnier will retire from the Board on 21st May 2008. |
No termination payments will be made in respect of any part of a notice period extending beyond the contract expiry dates.
Individual pension arrangements
For individual pension arrangements for the Executive Directors refer to page 85.
Other entitlements
In addition to the contractual provisions outlined above, in the event that Executive Directors’ service agreements are terminated by their employing company, the following would apply:
| • | in the case of outstanding awards under the GlaxoSmithKline Annual Investment Plan, provided that their agreement is terminated other than for cause, any deferred amount, and any income and gains, are automatically distributed as soon as administratively practicable after termination. If they resign, retire or the termination is for cause, then any deferred amount is not distributed until the end of the minimum three-year deferral period |
| • | in line with the policy applicable to US senior executives, Dr Garnier is entitled to receive continuing medical and dental insurance. Dr Slaoui and Mr Viehbacher are members of the same plan and may become eligible, at a future date, to receive continuing medical and dental cover into retirement |
| • | following the merger, those participants in the legacy share option schemes who elected to exchange their legacy options for options over GlaxoSmithKline shares will receive an additional cash benefit equal to 10% of the grant price of the original option. This additional benefit is triggered when the new option is exercised or lapses. To qualify for this additional cash benefit, participants had to retain their options until at least the second anniversary of the effective date of the merger. |
Outside appointments for Executive Directors
Any outside appointments must be approved by the Chairman on behalf of the Board. It is the company’s policy that remuneration earned from such appointments may be kept by the individual Executive Director.
| GSK Annual Report 2007 | 77 |
| REPORT OF THE DIRECTORS | |
| Remuneration Report | |
| Remuneration Report | |
| continued | |
Non-Executive Director terms, conditions and fees
Non-Executive Directors of GlaxoSmithKline do not have service contracts but instead have letters of appointment under which it is agreed that they serve the company as a Non-Executive Director until the conclusion of the Annual General Meeting following the third anniversary of their appointment. In each case this can be extended for a further term of three years by mutual agreement. No Directors serve a term longer than three years without offering themselves for re-election by the shareholders. The company aims to provide Non-Executive Directors with fees that are competitive with other companies of equivalent size and complexity.
The following table shows the date of the initial letter of appointment of each Non-Executive Director:
| Non-Executive | Date of letter | |
| Director | of appointment | |
| Professor Sir Roy Anderson | 28.09.07 | |
| Dr S Burns | 12.02.07 | |
| Mr L Culp | 09.06.03 | |
| Sir Crispin Davis | 09.06.03 | |
| Sir Deryck Maughan | 26.05.04 | |
| Dr D Podolsky | 03.07.06 | |
| Sir Ian Prosser | 19.06.00 | |
| Dr R Schmitz | 19.06.00 | |
| Mr T de Swaan | 21.12.05 | |
| Sir Robert Wilson | 09.06.03 | |
The fee structure for the Non-Executive Directors is as follows:
| Per annum | |||
| Standard annual cash retainer fee | £60,000 | ||
| Supplemental fees | |||
| Senior Independent Director, the Audit Committee Chairman and Scientific/Medical Experts | £30,000 | ||
| Chairmen of the Remuneration and Corporate Responsibility Committees | £20,000 | ||
Non-Executive Director undertakingintercontinental travel to meetings | £5,000 per meeting | ||
Exchange rate
Fees that are paid in US dollars are converted at a rate of £1/ US$1.8162, being the exchange rate that applied on 29th July 2004 when the fee arrangements were approved by the Board.
Non-Executive Directors’ share allocation plan
To enhance the link between Directors and shareholders GlaxoSmithKline requires Non-Executive Directors to receive a significant part of their fees in the form of shares. At least 25% of the Non-Executive Directors’ total fees, excluding the Chairman, are paid in the form of shares or ADSs and allocated to a share account. The Non-Executive Directors may also take the opportunity to invest part or all of the balance of their fees into the same share account.
The shares or ADSs which are notionally awarded to the Non-Executive Directors and allocated to their interest accounts are included within the Directors’ interests tables on page 81. The accumulated balance of these shares or ADSs, together with notional dividends subsequently reinvested, are not paid out to the Non-Executive Directors until retirement. Upon retirement, the Non-Executive Directors will receive either the shares or ADSs or a cash amount equal to the value of the shares or ADSs at the date of retirement.
Non-Executive Directors are not entitled to compensation if their appointment is terminated.
Chairman
Sir Christopher Gent’s letter of appointment to the Board was dated 26th May 2004, under which it was agreed that he serve the company as Deputy Chairman until 31st December 2004 and from 1st January 2005 as Chairman until the conclusion of the Annual General Meeting following the third anniversary of his appointment. This may be extended for a further term of three years by mutual agreement. From 2007, he receives £460,000 per annum plus an allocation of shares to the value of £115,000 per annum as Chairman.
TSR performance graph
The following graph sets out the performance of the company relative to the FTSE 100 Index of which the company is a constituent and to the performance comparator group from 1st January 2003 to 31st December 2007. The graph has been prepared in accordance with the Regulations and is not an indication of the likely vesting of awards granted under any of the company’s incentive plans.
 |
Directors and Senior Management remuneration
The following tables set out for the Directors of GlaxoSmithKline plc the remuneration earned in 2007, their interests in shares of GlaxoSmithKline plc, their interests in share options and incentive plans and their pension benefits. The members of the CET and the Company Secretary, known as the Senior Management, also participate in the same remuneration plans as the Executive Directors and the aggregate remuneration and interests of the Directors and Senior Management are also provided.
| 78 | GSK Annual Report 2007 |
| REPORT OF THE DIRECTORS | |
| Remuneration Report | |
| Remuneration Report | |
| continued | |
| 2007 | 2006 | ||||||||||
| Total | Total | ||||||||||
| Fees and | Other | Annual | annual | Fees and | Other | Annual | annual | ||||
| salary | benefits | bonus | remuneration | salary | benefits | bonus | remuneration | ||||
| Footnote | 000 | 000 | 000 | 000 | 000 | 000 | 000 | 000 | |||
| Executive Directors | |||||||||||
| Dr JP Garnier | a,b | $1,810 | $1,516 | $2,709 | $6,035 | $1,700 | $633 | $3,080 | $5,413 | ||
| Dr M Slaoui | $701 | $321 | $843 | $1,865 | $370 | $317 | $497 | $1,184 | |||
| Mr J Heslop | £438 | £16 | £410 | £864 | £380 | £31 | £437 | £848 | |||
| Non-Executive Directors | |||||||||||
| Professor Sir Roy Anderson | e | £23 | – | – | £23 | – | – | – | – | ||
| Sir Crispin Davis | £70 | – | – | £70 | £70 | – | – | £70 | |||
| Sir Christopher Gent | £575 | £1 | – | £576 | £500 | £1 | – | £501 | |||
| Sir Ian Prosser | £95 | – | – | £95 | £95 | – | – | £95 | |||
| Dr R Schmitz | £70 | – | – | £70 | £90 | – | – | £90 | |||
| Mr T de Swaan | £100 | – | – | £100 | £70 | – | – | £70 | |||
| Sir Robert Wilson | £90 | – | – | £90 | £90 | – | – | £90 | |||
| Dr S Burns | e | $124 | – | – | $124 | – | – | – | – | ||
| Mr L Culp | $127 | – | – | $127 | $136 | – | – | $136 | |||
| Sir Deryck Maughan | $136 | – | – | $136 | $136 | – | – | $136 | |||
| Dr D Podolsky | $191 | – | – | $191 | $100 | – | – | $100 | |||
| Former Directors | |||||||||||
| Mr J Coombe | a | – | £69 | – | £69 | – | £22 | – | £22 | ||
| Dr M Barzach | c | £56 | – | – | £56 | £57 | – | – | £57 | ||
| Sir Richard Sykes | – | £1 | – | £1 | – | £1 | – | £1 | |||
| Dr T Yamada | a | – | $250 | – | $250 | $428 | $493 | $281 | $1,202 | ||
| Dr L Shapiro | d | $85 | – | – | $85 | $144 | $11 | – | $155 | ||
| Total remuneration | £3,104 | £1,131 | £2,186 | £6,421 | £2,982 | £841 | £2,523 | £6,346 | |||
| Analysed as: | |||||||||||
| Executive Directors | £1,693 | £935 | £2,186 | £4,814 | £1,499 | £545 | £2,371 | £4,415 | |||
| Non-Executive Directors | £1,312 | £1 | – | £1,313 | £1,116 | £1 | – | £1,117 | |||
| Former Directors | £99 | £195 | – | £294 | £367 | £295 | £152 | £814 | |||
| Total remuneration | £3,104 | £1,131 | £2,186 | £6,421 | £2,982 | £841 | £2,523 | £6,346 | |||
| Remuneration for Directors on the US payroll is reported in Dollars. Dollar amounts are included in the totals based on conversion to Sterling at the average exchange rates for each year. | |
| a) | Following the merger, and in order to encourage employees to convert their non-savings related options, held over Glaxo Wellcome or SmithKline Beecham shares or ADSs, for options over GlaxoSmithKline shares or ADSs, employees were granted an additional cash benefit equal to 10% of the grant price of the original option. This additional benefit, known as the Exchange Offer Incentive (EOI), is only payable when the new option is exercised or lapses above market value. To qualify for this additional cash benefit, participants had to retain these options until at least the second anniversary of the effective date of the merger. During the year, Dr Garnier received $1,132,994 (2006 – $192,639), in EOI payments as a result of exercising options granted to him in March and November 1997, during February and August 2007. These options would have expired in March and November 2007 had they not been exercised. Full details of these option exercises are given on page 83. Dr Yamada received $184,516 (2006 – $60,204) and Mr Coombe received £67,200 (2006 – £nil). |
| b) | Dr Garnier is a Non-Executive Director of United Technologies Corporation, in respect of which he received $230,000 in 2007 (2006 – $230,000) in the form of deferred stock units which is not included above. |
| c) | Dr Barzach received fees of €81,933 (2006 – €84,244) from GlaxoSmithKline France for healthcare consultancy provided. These are included within fees and salary above. |
| d) | Although Dr Shapiro retired from the Board on 17th May 2006 she continues to be a member of GlaxoSmithKline’s Scientific Advisory Board for which, during 2007, she received fees of $85,000 (2006 – $85,000), of which $30,000 (2006 – $30,000) was in the form of ADSs. These are included within fees and salary above. |
| e) | Dr Burns joined the Board as a Non-Executive Director on 12th February 2007 and Professor Sir Roy Anderson joined the Board on 1st October 2007. Therefore no fees were paid to them in 2006. |
| None of the above Directors received reimbursement for expenses during the year requiring separate disclosure as required by the Regulations. | |
| GSK Annual Report 2007 | 79 |
| REPORT OF THE DIRECTORS | |
| Remuneration Report | |
| Remuneration Report | |
| continued | |
Non-Executive Directors’ remuneration
| 2007 | 2006 | |||||||||||
| Total | Cash | Shares/ADSs | Total | Cash | Shares/ADSs | |||||||
| Fees | 000 | 000 | 000 | 000 | 000 | 000 | ||||||
| Current Non-Executive Directors | ||||||||||||
| Professor Sir Roy Anderson | £23 | £17 | £6 | – | – | – | ||||||
| Sir Crispin Davis | £70 | – | £70 | £70 | – | £70 | ||||||
| Sir Christopher Gent | £575 | £460 | £115 | £500 | £400 | £100 | ||||||
| Sir Ian Prosser | £95 | £48 | £47 | £95 | £48 | £47 | ||||||
| Dr R Schmitz | £70 | £42 | £28 | £90 | £54 | £36 | ||||||
| Mr T de Swaan | £100 | £75 | £25 | £70 | £53 | £17 | ||||||
| Sir Robert Wilson | £90 | £68 | £22 | £90 | £68 | £22 | ||||||
| Dr S Burns | $124 | $62 | $62 | – | – | – | ||||||
| Mr L Culp | $127 | – | $127 | $136 | – | $136 | ||||||
| Sir Deryck Maughan | $136 | – | $136 | $136 | – | $136 | ||||||
| Dr D Podolsky | $191 | $96 | $95 | $100 | $50 | $50 | ||||||
| Former Non-Executive Directors | ||||||||||||
| Dr L Shapiro | – | – | – | $59 | $52 | $7 | ||||||
| Total Remuneration | £1,312 | £789 | £523 | £1,148 | £678 | £470 | ||||||
The table above sets out the remuneration received as Non-Executive Directors of GlaxoSmithKline. It does not include Dr Shapiro’s fees received as a member of GlaxoSmithKline’s Scientific Advisory Board.
From the formation of GSK, the Non-Executive Directors have been required to take at least a part of their total fees in the form of shares allocated to a share account which is not paid out until retirement from the Board. At least 25% of Non-Executive Directors’ fees, except those of the Chairman (see page 78 for further details), must be taken under the fee allocation arrangement. Non-Executive Directors can then elect to receive either all or part of the remaining cash payment in the form of further shares or ADSs. The total value of these shares and ADSs as at the date of award, together with the cash payment, forms their total fees, which are included within the Annual remuneration table under ‘Fees and salary’. The table above sets out the value of their fees received in the form of cash and shares and ADSs.
The table below sets out the accumulated number of shares and ADSs held by the Non-Executive Directors in relation to their fees received as Board members as at 31st December 2007, together with the movements in their accounts over the year.
| Number of shares and ADSs | ||||||||
| Non-Executive Directors’ share arrangements | Dividends | |||||||
| At 31.12.06 | Elected | reinvested | At 31.12.07 | |||||
| Current Non-Executive Directors | ||||||||
| Shares | ||||||||
| Professor Sir Roy Anderson | – | 438 | – | 438 | ||||
| Sir Crispin Davis | 18,057 | 5,283 | 729 | 24,069 | ||||
| Sir Christopher Gent | 17,721 | 8,704 | 728 | 27,153 | ||||
| Sir Ian Prosser | 20,465 | 3,586 | 810 | 24,861 | ||||
| Dr R Schmitz | 16,862 | 2,113 | 664 | 19,639 | ||||
| Mr T de Swaan | 1,233 | 1,888 | 35 | 3,156 | ||||
| Sir Robert Wilson | 4,716 | 1,699 | 192 | 6,607 | ||||
| ADSs | ||||||||
| Dr S Burns | – | 1,178 | 6 | 1,184 | ||||
| Mr L Culp | 8,979 | 2,410 | 358 | 11,747 | ||||
| Sir Deryck Maughan | 6,933 | 2,588 | 279 | 9,800 | ||||
| Dr D Podolsky | 942 | 1,811 | 43 | 2,796 | ||||
| 80 | GSK Annual Report 2007 |
| REPORT OF THE DIRECTORS | |
| Remuneration Report | |
| Remuneration Report | |
| continued | |
The following interests of the Directors and connected persons of the company are shown in accordance with the Listing Rules.
| Shares | ADSs | |||||||||||||
| 22nd February | 31st December | 1st January | 22nd February | 31st December | 1st January | |||||||||
| Footnote | 2008 | 2007 | 2007 | 2008 | 2007 | 2007 | ||||||||
| Executive Directors | ||||||||||||||
| Dr JP Garnier | a | – | – | – | 305,567 | 252,475 | 250,528 | |||||||
| Mr A Witty | b,e | 71,392 | – | – | – | – | – | |||||||
| Dr M Slaoui | a | 47,590 | 40,961 | 36,955 | 336 | 286 | 114 | |||||||
| Mr J Heslop | b | 45,906 | 41,529 | 28,554 | – | – | – | |||||||
| Mr C Viehbacher | a,e | 92,257 | – | – | 11,788 | – | – | |||||||
| Non-Executive Directors | ||||||||||||||
| Professor Sir Roy Anderson | d,f | 438 | 438 | – | – | – | – | |||||||
| Dr S Burns | c,f | 44 | 44 | 44 | 1,344 | 1,344 | 160 | |||||||
| Mr L Culp | f | – | – | – | 11,747 | 11,747 | 8,979 | |||||||
| Sir Crispin Davis | f | 29,236 | 29,236 | 23,224 | – | – | – | |||||||
| Sir Christopher Gent | f | 27,153 | 27,153 | 17,721 | – | – | – | |||||||
| Sir Deryck Maughan | f | – | – | – | 9,800 | 9,800 | 6,933 | |||||||
| Dr D Podolsky | f | – | – | – | 2,796 | 2,796 | 942 | |||||||
| Sir Ian Prosser | f | 25,771 | 25,771 | 21,375 | – | – | – | |||||||
| Dr R Schmitz | f | 25,319 | 25,319 | 22,542 | – | – | – | |||||||
| Mr T de Swaan | f | 3,156 | 3,156 | 1,233 | – | – | – | |||||||
| Sir Robert Wilson | f | 12,736 | 12,736 | 5,844 | – | – | – | |||||||
| One GlaxoSmithKline ADS represents two GlaxoSmithKline shares. The interests of the above-mentioned Directors at 22nd February 2008 reflect the change between the year-end and that date. | |
| a) | Includes ADSs purchased in the GlaxoSmithKline Stock Fund within the US Retirement Savings Plan and US Executive Supplemental Savings Plan. |
| b) | Includes shares purchased through the GlaxoSmithKline ShareReward Plan for Mr Heslop totalling 1,523 at 31st December 2007 (31st December 2006 – 1,250) and 1,577 shares at 22nd February 2008. Mr Witty held 1,577 shares in this plan as at 22nd February 2008. |
| c) | In the case of Dr Burns, the opening number of shares is shown as at 12th February 2007, the date she joined the Board. |
| d) | Professor Sir Roy Anderson joined the Board on 1st October 2007 and did not own any shares in GSK at that date. |
| e) | Mr Witty and Mr Viehbacher joined the Board on 31st January 2008 and their holdings are disclosed above from this date. As at 22nd February 2008, Mr Witty held options over a maximum of 1,524,244 shares granted under the company’s share option schemes and awards over a maximum of 396,727 shares under the company’s incentive plans and Mr Viehbacher held options over a maximum of 778,367 shares and 461,750 ADSs granted under the company’s share option schemes and awards over a maximum of 240,078 ADSs made under the company’s incentive plans. Mr Witty and Mr Viehbacher’s actual entitlement to GSK shares under these plans will depend on the extent to which the performance conditions, set at the time of the grant or award, have been met at the end of the respective performance periods. |
| f) | Includes shares and ADSs received as part or all of their fees, as described under Non-Executive Directors’ share allocation plan on page 78. Dividends received on these shares and ADSs were converted to shares and ADSs as at 31st December 2007. |
| a) | These details include the interests of Dr Slaoui’s connected person who is also an employee of GSK. |
| b) | As part of the main option grant that occurred on 19th February 2008, with a vesting period of 19th February 2008 to 19th February 2011, Dr Slaoui was awarded 158,750 ADS options with a grant price of $44.75 and Mr Heslop was awarded 242,750 share options with a grant price of £11.47. |
| GSK Annual Report 2007 | 81 |
| REPORT OF THE DIRECTORS | |
| Remuneration Report | |
| Remuneration Report | |
| continued | |
For those options outstanding at 31st December 2007, the earliest and latest vesting and lapse dates for options above and below the market price for a GlaxoSmithKline share at the year-end are given in the table below.
| Nominal vesting date* | Lapse date | |||||||||||||
| Weighted average | ||||||||||||||
| Dr JP Garnier | grant price | Number | earliest | latest | earliest | latest | ||||||||
| Above market price (“underwater”) at year-end: | vested options | $55.99 | 2,033,448 | 23.11.01 | 28.11.04 | 22.11.08 | 27.11.11 | |||||||
| unvested options | $54.68 | 1,050,000 | 21.02.09 | 20.02.10 | 20.02.16 | 19.02.17 | ||||||||
| Below market price at year-end: | vested options | $40.95 | 910,000 | 03.12.05 | 15.12.06 | 02.12.12 | 14.12.13 | |||||||
| unvested options | $43.73 | 460,000 | 02.12.07 | 02.12.07 | 01.12.14 | 01.12.14 | ||||||||
| Total ADS options as at 31st December 2007 | $51.34 | 4,453,448 | ||||||||||||
| Nominal vesting date* | Lapse date | |||||||||||||
| Weighted average | ||||||||||||||
| Dr M Slaoui | grant price | Number | earliest | latest | earliest | latest | ||||||||
| Above market price (“underwater”) at year-end: | vested options | £18.56 | 15,522 | 24.11.02 | 24.11.02 | 23.11.09 | 23.11.09 | |||||||
| unvested options | £14.68 | 73,340 | 21.02.09 | 21.02.09 | 20.02.16 | 20.02.16 | ||||||||
| Below market price at year-end: | vested options | £11.79 | 52,800 | 03.12.05 | 03.12.05 | 02.12.12 | 02.12.12 | |||||||
| unvested options | £11.23 | 29,050 | 02.12.07 | 02.12.07 | 01.12.14 | 01.12.14 | ||||||||
| Total share options as at 31st December 2007 | £13.55 | 170,712 | ||||||||||||
| Above market price (“underwater”) at year-end: | unvested options | $58.00 | 162,320 | 20.02.10 | 20.02.10 | 19.02.17 | 19.02.17 | |||||||
| Total ADS options as at 31st December 2007 | $58.00 | 162,320 | ||||||||||||
This includes those share options held by Dr Slaoui’s connected person, who is also an employee of GSK.
| Nominal vesting date* | Lapse date | |||||||||||||
| Weighted average | ||||||||||||||
| Mr J Heslop | grant price | Number | earliest | latest | earliest | latest | ||||||||
| Above market price (“underwater”) at year-end: | vested options | £17.04 | 194,438 | 31.07.01 | 28.11.04 | 30.07.08 | 27.11.11 | |||||||
| unvested options | £14.78 | 473,750 | 21.02.09 | 20.02.10 | 20.02.16 | 19.02.17 | ||||||||
| Below market price at year-end: | vested options | £12.70 | 54,000 | 28.10.06 | 28.10.06 | 27.10.13 | 27.10.13 | |||||||
| unvested options | £11.23 | 63,066 | 03.12.07 | 27.10.08 | 02.12.14 | 26.10.15 | ||||||||
| Total share options as at 31st December 2007 | £14.91 | 785,254 | ||||||||||||
| * Subsequent to the nominal vesting date, the Remuneration Committee meets to determine whether the required performance criteria have been satisfied. | ||||||||||||||
GSK grants share options to Executive Directors and Senior Managers on an annual basis. The Directors hold these options under the various share option plans referred to in Note 42 to the financial statements, ‘Employee share schemes’. None of the other Directors had an interest in any option over the company’s shares.
The table below sets out, for grants of share options in respect of 2003 and 2004 grant years, the performance period, whether or not the options have vested at 31st December 2007, and the performance targets.
| Performance target | ||||||||
| Vesting status | Annualised growth | Percentage of | ||||||
| Grant | Performance period | at 31.12.07 | in EPS under IFRS | award vesting | ||||
| December 2003 | 01.01.04 – 31.12.06 | Vested | > RPI + 5% | 100 | % | |||
| December 2004 | 01.01.05 – 31.12.07 | Unvested | RPI + 4% | 75 | % | |||
| RPI + 3% | 50 | % | ||||||
| < RPI + 3% | 0 | % | ||||||
| 82 | GSK Annual Report 2007 |
| REPORT OF THE DIRECTORS | |
| Remuneration Report | |
| Remuneration Report | |
| continued | |
The table below sets out, for grants of share options in respect of 2006, 2007 and 2008 grant years, the performance period, whether or not the options have vested at 31st December 2007, and the performance targets.
| Performance target | |||||
| Vesting status | Annualised growth | Percentage of | |||
| Grant | Performance period | at 31.12.07 | in EPS under IFRS | award vesting | |
| February 2006 | 01.01.06 – 31.12.08 | Unvested | > RPI + 6% | 100% | |
| February 2007 | 01.01.07 – 31.12.09 | Unvested | RPI + 5% | 83% | |
| February 2008 | 01.01.08 – 31.12.10 | Unvested | RPI + 4% | 67% | |
| RPI + 3% | 50% | ||||
| < RPI + 3% | 0% | ||||
| 2007 | 2006 | |||||||
| Grant | Market | |||||||
| Options exercised | Date | Number | price | price | Gain | Gain | ||
| Dr JP Garnier | 08.02.07 | 68,411 | $32.09 | 5$5.81 | $1,622,709 | $1,707,351 | ||
| 03.08.07 | 144,967 | $40.54 | $52.12 | $1,678,718 | ||||
| 06.08.07 | 80,357 | $40.54 | $52.00 | $920,891 | ||||
| Mr J Heslop | – | – | – | – | – | £195,480 | ||
| Aggregate gain on options exercised | £2,111,159 | £1,118,372 | ||||||
Dr Slaoui did not exercise any options during 2007 nor during the period from 17th May 2006 to 31st December 2006. Mr Heslop did not exercise any options during 2007. An EOI benefit of $1,132,994 (£566,497) was paid to Dr Garnier on exercise of his options. This benefit has been included in the table on page 79.
The highest and lowest closing prices during the year ended 31st December 2007 for GlaxoSmithKline shares were £14.93 and £11.60, respectively. The highest and lowest prices for GlaxoSmithKline ADSs during the year ended 31st December 2007 were $59.35 and $47.87, respectively. The market price for a GlaxoSmithKline share on 31st December 2007 was £12.79 (31st December 2006 – £13.44) and for a GlaxoSmithKline ADS was $50.39 (31st December 2006 – $52.69) . The prices on 22nd February 2008 were £11.10 per GlaxoSmithKline share and $44.08 per GlaxoSmithKline ADS.
Performance Share Plan (PSP) awards
| Market | Additional | |||||||||||||||||
| Dr JP Garnier – ADSs | Number | price on | Vested & deferred | ADS by | Number | |||||||||||||
| Unvested | granted in | date of | Market | dividends | Unvested | granted | ||||||||||||
| Performance period | at 31.12.06 | 2007 | grant | Number | price | Gain | Lapsed | reinvested | at 31.12.07 | in 2008 | ||||||||
| 01.01.04 – 31.12.06 | 219,392 | – | $44.57 | – | – | – | 219,392 | – | – | – | ||||||||
| 01.01.05 – 31.12.07 | 211,264 | – | $43.73 | – | – | – | – | 7,681 | 218,945 | – | ||||||||
| 01.01.06 – 31.12.08 | 223,186 | – | $51.02 | – | – | – | – | 8,114 | 231,300 | – | ||||||||
| 01.01.07 – 31.12.09 | – | 240,000 | $58.00 | – | – | – | – | 4,320 | 244,320 | – | ||||||||
| 01.01.08 – 31.12.10 | – | – | – | – | – | – | – | – | – | – | ||||||||
Dr Garnier held 76,042 deferred performance shares at year-end, which are not included in the above table. The increase in this balance of 2,719 relates to dividends reinvested during the year.
| Market | Additional | |||||||||||||||||
| Dr M Slaoui – Shares and ADSs | Number | price on | Vested & deferred | shares by | Number | |||||||||||||
| Unvested | granted in | date of | Market | dividends | Unvested | granted | ||||||||||||
| Performance period | at 31.12.06 | 2007 | grant | Number | price | Gain | Lapsed | reinvested | at 31.12.07 | in 2008 | ||||||||
| 01.01.04 – 31.12.06 | 5,000 | – | £12.70 | 2,500 | £14.88 | £37,200 | 2,500 | – | – | |||||||||
| 01.01.05 – 31.12.07 | 13,760 | – | £11.63 | – | – | – | – | 500 | 14,260 | |||||||||
| 01.01.06 – 31.12.08 | 29,147 | – | £14.68 | – | – | – | – | 1,061 | 30,208 | |||||||||
| Market | Additional | |||||||||||||||||
| Number | price on | Vested & deferred | ADS by | Number | ||||||||||||||
| Unvested | granted in | date of | Market | dividends | Unvested | granted | ||||||||||||
| Performance period | at 31.12.06 | 2007 | grant | Number | price | Gain | Lapsed | reinvested | at 31.12.07 | in 2008 | ||||||||
| 01.01.07 – 31.12.09 | – | 70,570 | $58.00 | – | – | – | – | 1,270 | 71,840 | – | ||||||||
| 01.01.08 - 31.12.10 | – | – | $44.75 | – | – | – | – | – | – | 70,570 | ||||||||
This includes those performance shares held by Dr Slaoui’s connected person, who is also an employee of GSK.
| GSK Annual Report 2007 | 83 |
| REPORT OF THE DIRECTORS | |
| Remuneration Report | |
| Remuneration Report | |
| continued | |
Incentive plans
Performance Share Plan (PSP) awards
| Mr J Heslop – Shares | Market | Additional | |||||||||||||||||
| Number | price on | Vested & exercised | shares by | Number | |||||||||||||||
| Unvested | granted in | date of | Market | dividends | Unvested | granted | |||||||||||||
| Performance period | at 31.12.06 | 2007 | grant | Number | price | Gain | Lapsed | reinvested | at 31.12.07 | in 2008 | |||||||||
| 01.01.04 – 31.12.06 | 5,000 | – | £12.70 | 2,500 | £14.88 | £37,200 | 2,500 | – | – | – | |||||||||
| 01.01.05 – 31.12.07 | 16,386 | – | £11.63 | – | – | – | – | 596 | 16,982 | – | |||||||||
| 01.01.06 – 31.12.08 | 101,487 | – | £14.68 | – | – | – | – | 3,691 | 105,178 | – | |||||||||
| 01.01.07 – 31.12.09 | – | 105,000 | £14.88 | – | – | – | – | 1,887 | 106,887 | – | |||||||||
| 01.01.08 – 31.12.10 | – | – | £11.47 | – | – | – | – | – | – | 105,000 | |||||||||
The PSP is a medium-term incentive scheme introduced during 2001. Under the terms of the PSP the number of shares actually vesting is determined following the end of the relevant three-year measurement period and is dependent on GSK’s performance during that period as described on pages 74 to 76. The performance share awards were previously granted annually in November or December prior to the start of the performance period but, since the 2006 grant, they are granted in February of the first year of the performance period.
The measurement period commences on 1st January ending after three years on 31st December. For awards with a performance period commencing on 1st January 2005 and subsequent awards, dividends are reinvested on the performance shares awarded to Executives, throughout the performance period and up to the date of the final award. The dividend reinvestment is calculated as of the ex-dividend date. Under the terms of the PSP, US participants may defer receipt of all or part of their vested awards. The total gain on vesting of PSP awards made by Executive Directors is £74,400 (2006 – £1,285,677).
The PSP awards granted to Executive Directors (excluding Dr Slaoui) in December 2004, with the performance period starting on 1st January 2005 and ending on 31st December 2007 vested in part because of GSK’s relative TSR performance placed the company above the median of the comparator group.
The awards made to other senior executives in 2004, including Dr Slaoui were dependent in part on TSR performance and in part on EPS performance. The TSR portion vested in part and the EPS portion vested in full.
The following vesting schedules apply to awards made in 2004 and 2006.
| Vesting schedule | ||||
| Award | Performance Period | TSR rank with 13 companies | Percentage of award vesting* | |
| 2004 | 01.01.05 – 31.12.07 | 1 | 100% | |
| 2006 | 01.01.06 – 31.12.08 | 2 | 100% | |
| 3 | 87% | |||
| 4 | 74% | |||
| 5 | 61% | |||
| 6 | 48% | |||
| Median | 35% | |||
| Below median | 0% | |||
The following vesting schedules apply to awards made in 2007 and 2008.
| Vesting schedule | ||||
| Award | Performance Period | TSR rank with 14 companies | Percentage of award vesting* | |
| 2007 | 01.01.07 – 31.12.09 | 1 | 100% | |
| 2008 | 01.01.08 – 31.12.10 | 2 | 100% | |
| 3 | 90% | |||
| 4 | 80% | |||
| 5 | 70% | |||
| 6 | 60% | |||
| 7 | 50% | |||
| Median | 35% | |||
| Below median | 0% | |||
| * | TSR is measured on a pro-rata basis. Where GlaxoSmithKline’s performance falls between two of the comparators, the level of vesting will be determined by the actual relative level of TSR rather than simple ranking. Dividends will be treated as reinvested during the performance period. |
| 84 | GSK Annual Report 2007 |
| REPORT OF THE DIRECTORS | |
| Remuneration Report | |
| Remuneration Report | |
| continued | |
Share Value Plan awards
Dr M Slaoui – Shares and ADSs
| Market | ||||||||||||||||||
| Number | price on | Vested & exercised | Number | |||||||||||||||
| Unvested | granted in | date of | �� | Market | Unvested | granted | ||||||||||||
| Plan year | at 31.12.06 | 2007 | grant | Number | price | Gain* | Lapsed | at 31.12.07 | in 2008 | |||||||||
| 2004 | 4,660 | – | £11.23 | 4,660 | £12.84 | £43,014 | – | – | – | |||||||||
| 2006 | 1,200 | – | £14.68 | – | – | – | – | 1,200 | – | |||||||||
| 2007 (ADSs) | – | 890 | $58.00 | – | – | – | – | 890 | – | |||||||||
| 2008 (ADSs) | – | – | $44.75 | – | – | – | – | – | 890 | |||||||||
| * | The gain disclosed relates only to Dr Slaoui and not to any person connected to him. |
In his capacity as SVP, Worldwide Business Development, Dr Slaoui was eligible to participate in the Share Value Plan. Both Dr Slaoui and his connected person, an employee of GSK, received awards under the Share Value Plan. Following the announcement of his appointment to the Board in February 2006, he ceased to be eligible to receive awards under this plan. The awards are subject to three year vesting periods and vesting is contingent on continued employment with GSK.
| Vested and | Additional ADS | Vested and | ||||
| deferred | by dividends | deferred | ||||
| participations | reinvested | participations | ||||
| Mid-Term Incentive Plan – ADSs | at 31.12.06 | in 2007 | at 31.12.07 | |||
| Dr JP Garnier | 173,694 | 6,443 | 180,137 | |||
The Mid-Term Incentive Plan (MTIP) was a share award scheme operated by SmithKline Beecham. The plan closed to new entrants upon completion of the merger and no further participations have been granted.
Where a final award of ADSs is made, receipt of the award may be deferred by a Director. Dr Garnier deferred receipt of the full amounts which vested in each year between 1999 and 2003. The deferred awards, together with any additional ADSs subsequently received through dividend reinvestment, are not included in the Directors’ interests table on page 81 since they are retained in the MTIP until paid out.
The accrued annual pension benefits and transfer values for Executive Directors in office on 31st December 2007 on retirement are set out below.
The regulations require disclosure of the accrued benefit at the end of the year, the change in accrued benefit over the year, the transfer value at both the beginning and end of the year and the change in the transfer value over the year. The Listing Rules require additional disclosure of the change in the accrued benefit net of inflation and the transfer value of this change. Pensions for the Executive Directors have been disclosed in the currency in which the pension is payable.
| Change in | ||||||||||||||||||
| Change in | Personal | accrued | Transfer value | |||||||||||||||
| Accrued | Accrued | accrued | contributions | Transfer | Transfer | Change | benefit over | of change | ||||||||||
| benefit at | benefit at | benefit | made during | value at | value at | in transfer | year net | in accrued | ||||||||||
| Executive Directors | 31.12.06 | 31.12.07 | over year | the year | 31.12.06 | 31.12.07 | value* | of inflation | benefit* | |||||||||
| 000 | 000 | 000 | 000 | 000 | 000 | 000 | 000 | 000 | ||||||||||
| Dr JP Garnier | $1,202 | $1,235 | $33 | – | $14,680 | $16,239 | $1,559 | ($18 | ) | $1,559 | ||||||||
| Dr M Slaoui | $26 | $72 | $46 | – | $131 | $400 | $269 | $44 | $269 | |||||||||
| €53 | €53 | – | – | €538 | €571 | €33 | (€2 | ) | €33 | |||||||||
| Mr J Heslop | £111 | £142 | £31 | £13 | £1,930 | £2,609 | £666 | £27 | £512 | |||||||||
| * | These are shown net of contributions made by the individual. |
Dr Garnier is a member of the All Employee US Cash Balance Pension Plan, under which GSK makes annual contributions calculated as a percentage of the employee’s base salary and bonus. GSK makes annual contributions of 15% of Dr Garnier’s annual salary and bonus, as detailed in his contract. The fund increases at an interest rate set annually in advance based on the 30 year US treasury bond rate to provide a cash sum at retirement. This cash sum is used to purchase a pension at retirement based on the annuity rates applicable at that time. The plan has no entitlement to a spouse’s pension or to pension increases, other than by reducing the executive’s own initial pension.
The transfer value, or cash sum, of Dr Garnier’s plan has increased by $1,558,562 over the year as a result of further accumulation of interest and contributions paid by the company. Dr Garnier will retire from the company on 31st May 2008.
| GSK Annual Report 2007 | 85 |
| REPORT OF THE DIRECTORS | |
| Remuneration Report | |
| Remuneration Report | |
| continued | |
Pensions
With effect from 1st June 2006, Dr Slaoui became a member of the US Executive Cash Balance Pension Plan, under which GSK makes annual contributions calculated as a percentage of the executive’s base salary. GSK makes annual contributions of 38% of Dr Slaoui’s annual salary. The fund increases at an interest rate set annually in advance based on the 30 year US treasury bond rate to provide a cash sum at retirement. This cash sum is used to purchase a pension at retirement based on the annuity rates applicable at that time. The plan has no entitlement to a spouse’s pension or to pension increases, other than by reducing the executive’s own initial pension.
The transfer value, or cash sum, of Dr Slaoui’s plan has increased by $268,771 over the year as a result of further accumulation of interest and contributions paid by the company.
Dr Slaoui was an active participant in the Belgium Fortis Plan until 31st May 2006. This plan is a defined benefit plan with a lump sum payable at normal retirement age for the plan which is 60 years of age. The transfer value, or cash sum, of Dr Slaoui’s plan has increased by €33,465 over the year as a result of the further accumulation of interest.
Mr Heslop participates in the Glaxo Wellcome Defined Benefit Plan with an accrual rate of 1/30th of final pensionable salary per annum. In 2000 all benefits accrued under the Glaxo Wellcome UK pension arrangements were augmented by the Trustees of the plans by 5% to reflect a distribution of surplus. This augmentation will apply to that element of Mr Heslop’s pension earnings before 31st March 2000.
Mr Heslop’s transfer value has been calculated on the basis of actuarial advice in accordance with Actuarial Guidance Note GN11. The transfer value represents the present value of future payments to be made under the pension plan. Mr Heslop’s annual accrued benefit has increased by £31,351 (£27,358 excluding the effects of inflation), and the transfer value less personal contributions has increased by £665,646 over the year. The increase in Mr Heslop’s pensionable salary of £58,000 is the primary reason for the increase in transfer value.
Dr Garnier and Dr Slaoui are also members of the US Retirement Savings Plan, a 401k savings scheme open to all US employees and the Executive Supplemental Savings Plan, a savings scheme open to executives to accrue benefits above US government limits imposed on the Retirement Savings Plan. Contributions to both plans are invested in a range of funds and the value of the accumulated funds is paid at retirement. During 2007, contributions of $198,475 (£99,238) were paid into these two schemes by GSK in respect of Dr Garnier. In respect of Dr Slaoui, contributions of $85,212 (£42,606) were paid into the scheme.
Directors and Senior Management
Further information is also provided on compensation and interests of Directors and Senior Management as a group (‘the group’). For this purpose, the group is defined as the Executive and Non-Executive Directors, members of the CET and the Company Secretary. For the financial year 2007, the total compensation paid to members of the group for the periods during which they served in that capacity was £14,490,295, the aggregate increase in accrued pension benefits, net of inflation, was £183,422 and the aggregate payment to defined contribution schemes was £442,922. Also accrued during the year was an amount of £1,739,000 relating to compensation for loss of office and £535,800 in respect of associated pension contributions.
During 2007, the members of the group were granted 933,930 share options and 1,333,820 ADS options under the Share Option Scheme, 403,130 shares and 579,070 ADSs under the Performance Share Plan and were awarded 2,520 shares and 890 ADSs under the Share Value Plan. Members of the group were also awarded 33,624 shares and 49,333 ADSs through the reinvestment of dividends in the Performance Share Plan.
At 22nd February 2008, the group (comprising 27 persons) owned 716,727 shares and 463,427 ADSs, constituting less than 1% of the issued share capital of the company. The group also held, at that date: options to purchase 7,759,454 shares and 7,667,846 ADSs; 1,393,001 shares and 1,531,017 ADSs awarded under the Performance Share Plan, including those shares and ADSs that are vested and deferred; 232,177 vested and deferred ADSs under the legacy SmithKline Beecham Mid-Term Incentive Plan, and 19,260 shares and 3,260 ADSs awarded under the Share Value Plan. These holdings were issued under the various executive share option plans described in Note 42 to the financial statements, ‘Employee share schemes’.
Directors’ interests in contracts
Except as described in Note 35 to the financial statements, ‘Related party transactions’, during or at the end of the financial year no Director or connected person had any material interest in any contract of significance in relation to the Group’s business with a Group company.
The Directors’ Remuneration Report has been approved by the Board of Directors and signed on its behalf by
Sir Christopher Gent
Chairman
27th February 2008
| 86 | GSK Annual Report 2007 |
| FINANCIAL STATEMENTS | |
| Financial statements | |
| GSK Annual Report 2007 | 87 |
| FINANCIAL STATEMENTS | |
| Directors’ statements of responsibility | |
| Directors’ statements of responsibility | |
Directors’ statement of responsibility in relation to the consolidated financial statements
The Directors are responsible for:
| • | ensuring the maintenance of proper accounting records, which disclose with reasonable accuracy the financial position of the Group at any time and from which financial statements can be prepared to comply with the Companies Acts 1985 and 2006, and Article 4 of the IAS Regulation |
| • | preparing financial statements for each financial period which give a true and fair view, in accordance with IFRS as adopted for use in the European Union, of the state of affairs of the Group as at the end of the financial period and of the profit or loss for that period |
| • | ensuring the operation of systems of internal control and for taking reasonable steps to safeguard the assets of the Group and for preventing and detecting fraud and other irregularities. |
The directors confirm that they have complied with the above requirements in preparing the financial statements.
The financial statements for the year ended 31st December 2007, comprising principal statements and supporting notes, are set out in ‘Financial statements’ on pages 90 to 158 of this report.
The Directors confirm that suitable accounting policies have been consistently applied in the preparation of the financial statements, supported by reasonable and prudent judgements and estimates as necessary.
The responsibilities of the auditors in relation to the financial statements are set out in the Independent Auditors’ report (page 89 opposite).
The financial statements for the year ended 31st December 2007 are included in the Annual Report 2007, which is published in hardcopy printed form and made available on the website. The Directors are responsible for the maintenance and integrity of the Annual Report on the website in accordance with UK legislation governing the preparation and dissemination of financial statements. Access to the website is available from outside the UK, where comparable legislation may be different.
Disclosure of information to auditors
The Directors, in office at the date of this Report, have each confirmed that:
| • | so far as they are aware, there is no relevant audit information of which the company’s auditors are unaware; and |
| • | each Director has taken all the steps that he/she ought to have taken as a Director to make himself/herself aware of any relevant audit information and to establish that the company’s auditors are aware of that information. |
This confirmation is given and should be interpreted in accordance with the provisions of Section 234 ZA of the Companies Act 1985.
Directors’ remuneration
The Remuneration Report on pages 71 to 86 sets out the remuneration policies operated by GlaxoSmithKline and disclosures on Directors’ remuneration and other disclosable information relating to Directors and officers and their interests. It has been prepared in accordance with the Companies Acts 1985 and 2006, and complies with Section B of the Combined Code on Corporate Governance.
Going concern basis
After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.
Internal control
The Board, through the Audit Committee, has reviewed the assessment of risks and the internal control framework that operates in GlaxoSmithKline and has considered the effectiveness of the system of internal control in operation in the Group for the year covered by this report and up to the date of its approval by the Board of Directors.
The Combined Code
The Board considers that GlaxoSmithKline plc applies the principles of the Combined Code on Corporate Governance of the Financial Reporting Council, as described under ‘Corporate governance’ on pages 59 to 70, and has complied with its provisions except as described on page 69.
As required by the Listing Rules of the Financial Services Authority, the auditors have considered the Directors’ statement of compliance in relation to those points of the Combined Code which are specified for their review.
Annual Report
The Annual Report for the year ended 31st December 2007, comprising the Report of the Directors, the Remuneration Report, the Financial statements and additional information for investors, has been approved by the Board of Directors and signed on its behalf by
Sir Christopher Gent
Chairman
27th February 2008
| 88 | GSK Annual Report 2007 |
| FINANCIALSTATEMENTS | |
| Independent Auditors’ report | |
| Report of Independent Registered Public Accounting Firm | |
| To the Board of Directors and Shareholders of GlaxoSmithKline plc | |
In our opinion, the accompanying consolidated income statements and the related consolidated balance sheets, consolidated statements of cash flows and, consolidated statements of recognised income and expense present fairly, in all material respects, the financial position of GlaxoSmithKline and its subsidiaries at 31st December 2007 and 2006 and the results of their operations and cash flows for each of the three years in the period ended 31st December 2007, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also, in our opinion the Group maintained, in all material respects, effective internal control over financial reporting as of 31st December 2007, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Group’s management are responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in ‘Management’s annual report on internal control over financial reporting’ on page 70. Our responsibility is to express opinions on these financial statements and on the Group’s internal control over financial reporting based on our audits (which were integrated audits in 2007 and 2006). We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Chartered Accountants and Registered Auditors
London
27th February 2008
| GSK Annual Report 2007 | 89 |
| FINANCIALSTATEMENTS | |
| Consolidated income statement | |
| Consolidated income statement | |
| for the year ended 31st December 2007 | |
| 2007 | 2006 | 2005 | |||||||||
| Business | Restructuring | ||||||||||
| Notes | performance | costs | Total | ||||||||
| £m | £m | £m | £m | £m | |||||||
| Turnover | 6 | 22,716 | – | 22,716 | 23,225 | 21,660 | |||||
| Cost of sales | (5,206 | ) | (111 | ) | (5,317 | ) | (5,010 | ) | (4,764 | ) | |
| Gross profit | 17,510 | (111 | ) | 17,399 | 18,215 | 16,896 | |||||
| Selling, general and administration | (6,817 | ) | (137 | ) | (6,954 | ) | (7,257 | ) | (7,250 | ) | |
| Research and development | (3,237 | ) | (90 | ) | (3,327 | ) | (3,457 | ) | (3,136 | ) | |
| Other operating income | 8 | 475 | – | 475 | 307 | 364 | |||||
| Operating profit | 9,10 | 7,931 | (338 | ) | 7,593 | 7,808 | 6,874 | ||||
| Finance income | 11 | 262 | – | 262 | 287 | 257 | |||||
| Finance costs | 12 | (453 | ) | – | (453 | ) | (352 | ) | (451 | ) | |
| Share of after tax profits of associates and joint ventures | 13 | 50 | – | 50 | 56 | 52 | |||||
| Profit before taxation | 7,790 | (338 | ) | 7,452 | 7,799 | 6,732 | |||||
| Taxation | 14 | (2,219 | ) | 77 | (2,142 | ) | (2,301 | ) | (1,916 | ) | |
| Profit after taxation for the year | 5,571 | (261 | ) | 5,310 | 5,498 | 4,816 | |||||
| Profit attributable to minority interests | 96 | – | 96 | 109 | 127 | ||||||
| Profit attributable to shareholders | 5,475 | (261 | ) | 5,214 | 5,389 | 4,689 | |||||
| 5,571 | (261 | ) | 5,310 | 5,498 | 4,816 | ||||||
| Basic earnings per share (pence) | 15 | 94.4 | p | 95.5 | p | 82.6 | p | ||||
| Diluted earnings per share (pence) | 15 | 93.7 | p | 94.5 | p | 82.0 | p | ||||
The calculation of business performance, a supplemental non-IFRS measure, is described in Note 1, ‘Presentation of the financial statements’.
| 90 | GSK Annual Report 2007 |
| FINANCIAL STATEMENTS | |
| Consolidated balance sheet | |
| Consolidated balance sheet | |
| at 31st December 2007 | |
| 2007 | 2006 | ||||
| Notes | £m | £m | |||
| Non-current assets | |||||
| Property, plant and equipment | 17 | 7,821 | 6,930 | ||
| Goodwill | 18 | 1,370 | 758 | ||
| Other intangible assets | 19 | 4,456 | 3,293 | ||
| Investments in associates and joint ventures | 20 | 329 | 295 | ||
| Other investments | 21 | 517 | 441 | ||
| Deferred tax assets | 14 | 2,196 | 2,123 | ||
| Derivative financial instruments | 41 | 1 | 113 | ||
| Other non-current assets | 22 | 687 | 608 | ||
| Total non-current assets | 17,377 | 14,561 | |||
| Current assets | |||||
| Inventories | 23 | 3,062 | 2,437 | ||
| Current tax recoverable | 14 | 58 | 186 | ||
| Trade and other receivables | 24 | 5,495 | 5,237 | ||
| Derivative financial instruments | 41 | 475 | 80 | ||
| Liquid investments | 32 | 1,153 | 1,035 | ||
| Cash and cash equivalents | 25 | 3,379 | 2,005 | ||
| Assets held for sale | 26 | 4 | 12 | ||
| Total current assets | 13,626 | 10,992 | |||
| Total assets | 31,003 | 25,553 | |||
| Current liabilities | |||||
| Short-term borrowings | 32 | (3,504 | ) | (718 | ) |
| Trade and other payables | 27 | (4,861 | ) | (4,831 | ) |
| Derivative financial instruments | 41 | (262 | ) | (40 | ) |
| Current tax payable | 14 | (826 | ) | (621 | ) |
| Short-term provisions | 29 | (892 | ) | (1,055 | ) |
| Total current liabilities | (10,345 | ) | (7,265 | ) | |
| Non-current liabilities | |||||
| Long-term borrowings | 32 | (7,067 | ) | (4,772 | ) |
| Deferred tax liabilities | 14 | (887 | ) | (595 | ) |
| Pensions and other post-employment benefits | 28 | (1,383 | ) | (2,339 | ) |
| Other provisions | 29 | (1,035 | ) | (528 | ) |
| Derivative financial instruments | 41 | (8 | ) | (60 | ) |
| Other non-current liabilities | 30 | (368 | ) | (346 | ) |
| Total non-current liabilities | (10,748 | ) | (8,640 | ) | |
| Total liabilities | (21,093 | ) | (15,905 | ) | |
| Net assets | 9,910 | 9,648 | |||
| Equity | |||||
| Share capital | 33 | 1,503 | 1,498 | ||
| Share premium account | 33 | 1,266 | 858 | ||
| Retained earnings | 34 | 6,475 | 6,965 | ||
| Other reserves | 34 | 359 | 65 | ||
| Shareholders’ equity | 9,603 | 9,386 | |||
| Minority interests | 34 | 307 | 262 | ||
| Total equity | 9,910 | 9,648 | |||
Approved by the Board on 27th February 2008
Sir Christopher Gent
Chairman
| GSK Annual Report 2007 | 91 |
| FINANCIALSTATEMENTS | |
| Consolidated cash flow statement | |
| Consolidated cash flow statement | |
| for the year ended 31st December 2007 | |
| 2007 | 2006 | 2005 | ||||||
| Notes | £m | £m | £m | |||||
| Cash flow from operating activities | ||||||||
| Cash generated from operations | 36 | 8,080 | 8,203 | 7,665 | ||||
| Taxation paid | (1,919 | ) | (3,846 | ) | (1,707 | ) | ||
| Net cash inflow from operating activities | 6,161 | 4,357 | 5,958 | |||||
| Cash flow from investing activities | ||||||||
| Purchase of property, plant and equipment | (1,516 | ) | (1,366 | ) | (903 | ) | ||
| Proceeds from sale of property, plant and equipment | 35 | 43 | 54 | |||||
| Proceeds from sale of intangible assets | 9 | 175 | 221 | |||||
| Purchase of intangible assets | (627 | ) | (224 | ) | (278 | ) | ||
| Purchase of equity investments | (186 | ) | (57 | ) | (23 | ) | ||
| Proceeds from sale of equity investments | 45 | 32 | 35 | |||||
| Share transactions with minority shareholders | 38 | – | (157 | ) | (36 | ) | ||
| Purchase of businesses, net of cash acquired | 38 | (1,027 | ) | (273 | ) | (1,026 | ) | |
| Disposal of businesses and interest in associates | 38 | – | 5 | (2 | ) | |||
| Investments in associates and joint ventures | 38 | (1 | ) | (13 | ) | (2 | ) | |
| Interest received | 247 | 299 | 290 | |||||
| Dividends from associates and joint ventures | 12 | 15 | 10 | |||||
| Net cash outflow from investing activities | (3,009 | ) | (1,521 | ) | (1,660 | ) | ||
| Cash flow from financing activities | ||||||||
| (Increase)/decrease in liquid investments | (39 | ) | (55 | ) | 550 | |||
| Proceeds from own shares for employee share options | 116 | 151 | 68 | |||||
| Shares acquired by ESOP Trusts | (26 | ) | – | – | ||||
| Issue of share capital | 33 | 417 | 316 | 252 | ||||
| Purchase of own shares for cancellation | (213 | ) | – | – | ||||
| Purchase of Treasury shares | (3,538 | ) | (1,348 | ) | (999 | ) | ||
| Increase in long-term loans | 3,483 | – | 982 | |||||
| Repayment of long-term loans | (207 | ) | – | (70 | ) | |||
| Net increase in/(repayment of) short-term loans | 1,632 | (739 | ) | (857 | ) | |||
| Net repayment of obligations under finance leases | (39 | ) | (34 | ) | (36 | ) | ||
| Interest paid | (378 | ) | (414 | ) | (381 | ) | ||
| Dividends paid to shareholders | (2,793 | ) | (2,598 | ) | (2,390 | ) | ||
| Dividends paid to minority interests | (77 | ) | (87 | ) | (86 | ) | ||
| Other financing cash flows | (79 | ) | 16 | 53 | ||||
| Net cash outflow from financing activities | (1,741 | ) | (4,792 | ) | (2,914 | ) | ||
| Increase/(decrease) in cash and bank overdrafts | 37 | 1,411 | (1,956 | ) | 1,384 | |||
| Exchange adjustments | 48 | (254 | ) | 233 | ||||
| Cash and bank overdrafts at beginning of year | 1,762 | 3,972 | 2,355 | |||||
| Cash and bank overdrafts at end of year | 3,221 | 1,762 | 3,972 | |||||
| Cash and bank overdrafts at end of year comprise: | ||||||||
| Cash and cash equivalents | 3,379 | 2,005 | 4,209 | |||||
| Overdrafts | (158 | ) | (243 | ) | (237 | ) | ||
| 3,221 | 1,762 | 3,972 | ||||||
| 92 | GSK Annual Report 2007 |
| FINANCIAL STATEMENTS | |
| Consolidated statement of recognised income and expense | |
| Consolidated statement of recognised income and expense | |
| for the year ended 31st December 2007 | |
| 2007 | 2006 | 2005 | ||||
| £m | £m | £m | ||||
| Exchange movements on overseas net assets | 425 | (390 | ) | 203 | ||
| Tax on exchange movements | 21 | (78 | ) | 99 | ||
| Fair value movements on available-for-sale investments | (99 | ) | 84 | (1 | ) | |
| Deferred tax on fair value movements on available-for-sale investments | 19 | (15 | ) | (10 | ) | |
| Exchange movements on goodwill in reserves | (14 | ) | 31 | 9 | ||
| Actuarial gains/(losses) on defined benefit plans | 671 | 429 | (794 | ) | ||
| Deferred tax on actuarial movements in defined benefit plans | (195 | ) | (161 | ) | 257 | |
| Fair value movements on cash flow hedges | (6 | ) | (5 | ) | (4 | ) |
| Deferred tax on fair value movements on cash flow hedges | 2 | 2 | 1 | |||
| Net profits/(losses) recognised directly in equity | 824 | (103 | ) | (240 | ) | |
| Profit for the year | 5,310 | 5,498 | 4,816 | |||
| Total recognised income and expense for the year | 6,134 | 5,395 | 4,576 | |||
| Total recognised income and expense for the year attributable to: | ||||||
| Shareholders | 6,012 | 5,307 | 4,423 | |||
| Minority interests | 122 | 88 | 153 | |||
| 6,134 | 5,395 | 4,576 | ||||
| GSK Annual Report 2007 | 93 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
1 Presentation of the financial statements
Description of business
GlaxoSmithKline is a major global healthcare group which is engaged in the creation and discovery, development, manufacture and marketing of pharmaceutical products including vaccines, over-the-counter (OTC) medicines and health-related consumer products. GSK’s principal pharmaceutical products include medicines in the following therapeutic areas: respiratory, central nervous system, anti-virals, anti-bacterials, metabolic, vaccines, cardiovascular and urogenital, anti-bacterial, oncology and emesis.
Compliance with applicable law and IFRS
The financial statements have been prepared in accordance with the Companies Act 1985, Article 4 of the IAS Regulation and International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) and related interpretations, as adopted by the European Union.
The financial statements are also in compliance with IFRS as issued by the International Accounting Standards Board.
Composition of financial statements
The consolidated financial statements are drawn up in Sterling, the functional currency of GlaxoSmithKline plc, and in accordance with IFRS accounting presentation. The financial statements comprise:
| • | Consolidated income statement |
| • | Consolidated balance sheet |
| • | Consolidated cash flow statement |
| • | Consolidated statement of recognised income and expense |
| • | Notes to the financial statements. |
Accounting convention
The financial statements have been prepared using the historical cost convention, as modified by the revaluation of certain items, as stated in the accounting policies.
Financial period
These financial statements cover the financial year from 1st January to 31st December 2007, with comparative figures for the financial years from 1st January to 31st December 2006 and, where appropriate, from 1st January to 31st December 2005.
Composition of the Group
A list of the subsidiary and associated undertakings which, in the opinion of the Directors, principally affected the amount of profit or the net assets of the Group is given in Note 43, ‘Principal Group companies’.
Presentation of business performance
A columnar presentation has been adopted in the income statement in order to illustrate underlying business performance. Business performance, which is a supplemental non-IFRS measure, is the primary performance measure used by management and is presented after excluding costs relating to the new Operational Excellence programme, which commenced in October 2007, and significant acquisitions. Management believes that exclusion of these items provides a better reflection of the way in which the business is managed and gives a more thanuseful indication of the underlying performance of the Group. This information, which is provided in addition to the total results prepared under IFRS, is given to assist shareholders to gain a clearer understanding of the underlying performance of the business and to increase comparability for the periods presented.
Accounting principles and policies
The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The financial statements have been prepared in accordance with the Group’s accounting policies approved by the Board and described in Note 2, ‘Accounting policies’. Information on the application of these accounting policies, including areas of estimation and judgement is given in Note 3, ‘Key accounting judgements and estimates’. During 2007 the Group has implemented IFRS 7 ‘Financial instruments: disclosures’, which amends and adds to previous disclosures relating to financial instruments.
Consolidation
The consolidated financial statements include:
| • | the assets and liabilities, and the results and cash flows, of thecompany and its subsidiaries, including ESOP Trusts |
| • | the Group’s share of the results and net assets of associates andjoint ventures. |
The financial statements of entities consolidated are made up to 31st December each year.
Entities over which the Group has the power to govern the financial and operating policies are accounted for as subsidiaries. Where the Group has the ability to exercise joint control, the entities are accounted for as joint ventures, and where the Group has the ability to exercise significant influence, they are accounted for as associates. The results and assets and liabilities of associates and joint ventures are incorporated into the consolidated financial statements using the equity method of accounting.
Interests acquired in entities are consolidated from the date the Group acquires control and interests sold are de-consolidated from the date control ceases.
Transactions and balances between subsidiaries are eliminated; no profit before tax is taken on sales between subsidiaries or on sales to joint ventures and associates until the products are sold to customers outside the Group. Deferred tax relief on unrealised intra-Group profit is accounted for only to the extent that it is considered recoverable.
Goodwill arising on the acquisition of interests in subsidiaries, joint ventures and associates, representing the excess of the acquisition cost over the Group’s share of the fair values of the identifiable assets, liabilities and contingent liabilities acquired, is capitalised as a separate item in the case of subsidiaries and as part of the cost of investment in the case of joint ventures and associates. Goodwill is denominated in the currency of the operation acquired. Where the cost of acquisition is below the fair value of the net assets acquired, the difference is recognised directly in the income statement.
| 94 | GSK Annual Report 2007 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
2 Accounting policiescontinued
Foreign currency translation
Foreign currency transactions are booked in the functional currency of the Group company at the exchange rate ruling on the date of transaction. Foreign currency monetary assets and liabilities are retranslated into the functional currency at rates of exchange ruling at the balance sheet date. Exchange differences are included in the income statement.
On consolidation, assets and liabilities, including related goodwill, of overseas subsidiaries, associates and joint ventures, are translated into Sterling at rates of exchange ruling at the balance sheet date. The results and cash flows of overseas subsidiaries, associates and joint ventures are translated into Sterling using average rates of exchange. Exchange adjustments arising when the opening net assets and the profits for the year retained by overseas subsidiaries, associates and joint ventures are translated into Sterling, less exchange differences arising on related foreign currency borrowings which hedge the Group’s net investment in these operations, are taken to a separate component of equity.
When translating into Sterling the assets, liabilities, results and cash flows of overseas subsidiaries, associates and joint ventures which are reported in currencies of hyper-inflationary economies, adjustments are made to reflect current price levels. Any loss on net monetary assets is charged to the consolidated income statement.
Revenue
Revenue is recognised in the income statement when goods or services are supplied or made available to external customers against orders received, title and risk of loss is passed to the customer, and reliable estimates can be made of relevant deductions. Turnover represents net invoice value after the deduction of discounts and allowances given and accruals for estimated future rebates and returns. The methodology and assumptions used to estimate rebates and returns are monitored and adjusted regularly in the light of contractual and legal obligations, historical trends, past experience and projected market conditions. Market conditions are evaluated using wholesaler and other third-party analyses, market research data and internally generated information. Turnover also includes co-promotion income where the Group records its share of the revenue but no related cost of sales. Value added tax and other sales taxes are excluded from revenue.
Expenditure
Expenditure is recognised in respect of goods and services received when supplied in accordance with contractual terms. Provision is made when an obligation exists for a future liability in respect of a past event and where the amount of the obligation can be reliably estimated. Manufacturing start-up costs between validation and the achievement of normal production are expensed as incurred. Advertising and promotion expenditure is charged to the income statement as incurred. Shipment costs on intercompany transfers are charged to cost of sales; distribution costs on sales to customers are included in selling, general and administrative expenditure. Restructuring costs are recognised and provided for, where appropriate, in respect of the direct expenditure of a business reorganisation where the plans are sufficiently detailed and well advanced, and where appropriate communication to those affected has been undertaken.
Research and development
Research and development expenditure is charged to the income statement in the period in which it is incurred. Development expenditure is capitalised when the criteria for recognising an asset are met, usually when a regulatory filing has been made in a major market and approval is considered highly probable. Property, plant and equipment used for research and development is depreciated in accordance with the Group’s policy.
Environmental expenditure
Environmental expenditure related to existing conditions resulting from past or current operations and from which no current or future benefit is discernible is charged to the income statement. The Group recognises its liability on a site-by-site basis when it can be reliably estimated. This liability includes the Group’s portion of the total costs and also a portion of other potentially responsible parties’ costs when it is probable that they will not be able to satisfy their respective shares of the clean-up obligation. Recoveries of reimbursements are recorded as assets when virtually certain.
Legal and other disputes
Provision is made for the anticipated settlement costs of legal or other disputes against the Group where an outflow of resources is considered probable and a reasonable estimate can be made of the likely outcome. In addition, provision is made for legal or other expenses arising from claims received or other disputes. In respect of product liability claims related to products where there is sufficient history of claims made and settlements, an “incurred but not reported” (IBNR) actuarial technique is used to determine a reasonable estimate of the Group’s exposure to unasserted claims for those products and a provision is made on that basis.
No provision is made for other unasserted claims or where an obligation exists under a dispute but it is not possible to make a reasonable estimate. Costs associated with claims made by the Group against third parties are charged to the income statement as they are incurred.
Pensions and other post-employment benefits
The costs of providing pensions under defined benefit schemes are calculated using the projected unit credit method and spread over the period during which benefit is expected to be derived from the employees’ services, in accordance with the advice of qualified actuaries. Pension obligations are measured as the present value of estimated future cash flows discounted at rates reflecting the yields of high quality corporate bonds.
Pension scheme assets are measured at fair value at the balance sheet date. Actuarial gains and losses, differences between the expected and actual returns of assets and the effect of changes in actuarial assumptions, are recognised in the statement of recognised income and expense in the year in which they arise. The Group’s contributions to defined contribution plans are charged to the income statement as incurred.
The costs of other post-employment liabilities are calculated in a similar way to defined benefit pension schemes and spread over the period during which benefit is expected to be derived from the employees’ services, in accordance with the advice of qualified actuaries.
| GSK Annual Report 2007 | 95 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
2 Accounting policiescontinued
Employee share plans
Incentives in the form of shares are provided to employees under share option and share award schemes.
The fair values of these options and awards are calculated at their grant dates using a Black-Scholes option pricing model and charged to the income statement over the relevant vesting periods.
The Group provides finance to ESOP Trusts to purchase company shares on the open market to meet the obligation to provide shares when employees exercise their options or awards. Costs of running the ESOP Trusts are charged to the income statement. Shares held by the ESOP Trusts are deducted from other reserves. A transfer is made between other reserves and retained earnings over the vesting periods of the related share options or awards to reflect the activitiesultimate proceeds receivable from employees on exercise.
Property, plant and equipment
Property, plant and equipment (PP&E) is stated at the cost of purchase or construction less provisions for depreciation and impairment. Financing costs are not capitalised.
Depreciation is calculated to write off the cost less residual value of PP&E, excluding freehold land, using the straight-line basis over the expected useful life. Residual values and lives are reviewed, and where appropriate adjusted, annually. The normal expected useful lives of the major categories of PP&E are:
| Freehold buildings | 20 to 50 years |
| Leasehold land and buildings | Lease term or 20 to 50 years |
| Plant and machinery | 10 to 20 years |
| Fixtures and equipment | 3 to 10 years |
On disposal of PP&E, the cost and related accumulated depreciation and impairments are removed from the financial statements and the net amount, less any proceeds, is taken to the income statement.
Leases
Leasing agreements which transfer to the Group substantially all the benefits and risks of ownership of an asset are treated as finance leases, as if the asset had been purchased outright. The assets are included in PP&E or computer software and the capital elements of the leasing commitments are shown as obligations under finance leases. Assets held under finance leases are depreciated on a basis consistent with similar owned assets or the lease term if shorter. The interest element of the lease rental is included in the income statement. All other leases are operating leases and the rental costs are charged to the income statement on a straight-line basis over the lease term.
Goodwill
Goodwill is stated at cost less impairments. Goodwill is deemed to have an indefinite useful life and is tested for impairment annually.
Where the fair value of the interest acquired in an entity’s assets, liabilities and contingent liabilities exceeds the consideration paid, this excess is recognised immediately as a gain in the income statement.
Other intangible assets
Intangible assets are stated at cost less provisions for amortisation and impairments.
Licences, patents, know-how and marketing rights separately acquired or acquired as part of a business combination are amortised over their estimated useful lives, using the straight-line basis, from the time they are available for use. The estimated useful lives for determining the amortisation charge take into account patent lives, where applicable, as well as the value obtained from periods of non-exclusivity. Asset lives are reviewed, and where appropriate adjusted, annually. Any development costs incurred by the Group and associated with acquired licences, patents, know-how or marketing rights are written off to the income statement when incurred, unless the criteria for recognition of an internally generated intangible asset are met, usually when a regulatory filing has been made in a major market and approval is considered highly probable.
Acquired brands are valued independently as part of the fair value of businesses acquired from third parties where the brand has a value which is substantial and long-term and where the brands can be sold separately from the rest of the businesses acquired. Brands are amortised over their estimated useful lives, except where it is considered that the useful economic life is indefinite.
The costs of acquiring and developing computer software for internal use and internet sites for external use are capitalised as intangible fixed assets where the software or site supports a significant business system and the expenditure leads to the creation of a durable asset. ERP systems software is amortised over seven years and other computer software over three to five years.
Impairment of non-current assets
The carrying values of all non-current assets are reviewed for impairment when there is an indication that the assets might be impaired. Additionally, goodwill, intangible assets with indefinite useful lives and intangible assets which are not yet available for use are tested for impairment annually. Any provision for impairment is charged to the income statement in the year concerned.
Investments in associates and joint ventures
Investments in associates and joint ventures are carried in the consolidated balance sheet at the Group’s share of their net assets at date of acquisition and of their post-acquisition retained profits or losses together with any goodwill arising on the acquisition.
| 96 | GSK Annual Report 2007 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
2 Accounting policiescontinued
Available-for-sale investments
Liquid investments and other investments are classified as available-for-sale investments and are initially recorded at fair value plus transaction costs and then remeasured at subsequent reporting dates to fair value. Unrealised gains and losses on available-for-sale investments are recognised directly in equity. Impairments arising from the significant or prolonged decline in fair value of an investment reduce the carrying amount of the asset directly and are charged to the income statement. On disposal or impairment of the investments, any gains and losses that have been deferred in equity are recycled into the income statement. Dividends on equity investments are recognised in the income statement when the Group’s right to receive payment is established. Equity investments are recorded in non-current assets unless they are expected to be sold within one year.
Purchases and sales of equity investments are accounted for on the trade date and purchases and sales of other available-for-sale investments are accounted for on settlement date.
Inventories
Inventories are included in the financial statements at the lower of cost (including raw materials, direct labour, other direct costs and related production overheads) and net realisable value. Cost is generally determined on a first in, first out basis. Pre-launch inventory is held as an asset when there is a high probability of regulatory approval for the product. Before that point a provision is made against the carrying value to its USrecoverable amount; the provision is then reversed at the point when a high probability of regulatory approval is determined.
Trade receivables
Trade receivables are carried at original invoice amount less any provisions for doubtful debts. Provisions are made where there is evidence of a risk of non-payment, taking into account ageing, previous experience and general economic conditions. When a trade receivable is determined to be uncollectable it is written off, firstly against any provision available and then to the income statement. Subsequent recoveries of amounts previously provided for are credited to the income statement. Long-term receivables are discounted where the effect is material.
Trade payables
Trade payables are held at amortised cost which equates to nominal value. Long-term payables are discounted where the effect is material.
Cash and cash equivalents
Cash and cash equivalents comprise cash in hand, current balances with banks and similar institutions and highly liquid investments with original maturities of three months or less. They are readily convertible into known amounts of cash and have an insignificant risk of changes in value.
Taxation
Current tax is provided at the amounts expected to be paid applying tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised.
Deferred tax is provided on temporary differences arising on investments in subsidiaries, associates and joint ventures, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future.
Deferred tax is provided using rates of tax that have been enacted or substantively enacted by the balance sheet date. Deferred tax liabilities and assets are not discounted.
Derivative financial instruments and hedging
Derivative financial instruments are used to manage exposure to market risks from treasury operations. The principal derivative instruments used by GlaxoSmithKline are foreign currency swaps, interest rate swaps and forward foreign exchange contracts. The Group does not hold or issue derivative financial instruments for trading or speculative purposes.
GlaxoSmithKline isDerivative financial instruments are classified as held-for-trading and are carried in continuing discussionsthe balance sheet at fair value. Derivatives designated as hedging instruments are classified on inception as cash flow hedges, net investment hedges or fair value hedges.
Changes in the fair value of derivatives designated as cash flow hedges are recognised in equity, to the extent that the hedges are effective. Ineffective portions are recognised in profit or loss immediately. Amounts deferred in equity are recycled to the income statement when the hedged item affects profit or loss.
Net investment hedges are accounted for in a similar way to cash flow hedges.
Changes in the fair value of derivatives designated as fair value hedges are recorded in the income statement, together with the Inland changes in the fair value of the hedged asset or liability.
Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately in the income statement.
Discounting
Where the time effect of money is material, balances are discounted to current values using appropriate rates of interest. The unwinding of the discounts is recorded in finance income/costs.
| GSK Annual Report 2007 | 97 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
3 Key accounting judgements and estimates
In preparing the financial statements, management is required to make estimates and assumptions that affect the amounts of assets, liabilities, revenue and expenses reported in the financial statements. Actual amounts and results could differ from those estimates. The following are considered to be the key accounting judgements and estimates made.
Turnover
Revenue is recognised when title and risk of loss is passed to the customer and reliable estimates can be made of relevant deductions. Gross turnover is reduced by rebates, discounts, allowances and product returns given or expected to be given, which vary by product arrangements and buying groups. These arrangements with purchasing organisations are dependent upon the submission of claims some time after the initial recognition of the sale. Accruals are made at the time of sale for the estimated rebates, discounts or allowances payable or returns to be made, based on available market information and historical experience. Because the amounts are estimated they may not fully reflect the final outcome, and the amounts are subject to change dependent upon, amongst other things, the types of buying group and product sales mix. The level of accrual is reviewed and adjusted regularly in respectthe light of UK transfer pricing disputes.contractual and legal obligations, historical trends, past experience and projected market conditions. Market conditions are evaluated using wholesaler and other third-party analyses, market research data and internally generated information. Future events could cause the assumptions on which the accruals are based to change, which could affect the future results of the Group.
GlaxoSmithKlineWhere the Group co-promotes a product and the third party records the sale, the Group records its share of revenue as co-promotion income within turnover. The nature of co-promotion activities is such that the Group records no costs of sales. Pharmaceutical turnover includes co-promotion revenue of £274 million (2006 – £182 million, 2005 – £112 million).
Taxation
Current tax is provided at the amounts expected to be paid, and deferred tax is provided on temporary differences between the tax bases of assets and liabilities and their carrying amounts, at the rates that have been enacted or substantively enacted by the balance sheet date.
The Group has open tax issues with a number of revenue authorities. GSK uses the best advice in determining its transfer pricing methodology and in seeking to manage transfer pricing issues to a satisfactory conclusion and, on the basis of external professional advice, continues to believe that it has made adequate provision for the liabilities likely to arise from open assessments. However,Where open issues exist the ultimate liability for such matters may vary from the amounts provided and is dependent upon the outcome of negotiations with the relevant tax authorities or, if necessary, litigation proceedings.
Legal and other disputes
GSK provides for anticipated settlement costs where a reasonable estimate may be made of the likely outcome of the dispute and legal and other expenses arising from claims against the Group.
The company’s Directors, having taken legal advice, have established provisions after taking into account the relevant facts and circumstances of each matter and in accordance with accounting requirements. Provisions for product liability claims on certain products have been made on an ‘incurred but not reported’ basis where sufficient history of claims made and settlements is available.
No provisions have been made for other unasserted claims or for claims for which no reasonable estimate of the likely outcome can yet be made. The ultimate liability for pending and unasserted claims may vary from the amounts provided, if any, and is dependent upon the outcome of litigation proceedings, investigations and possible settlement negotiations.
Property, plant and equipment
The carrying values of property, plant and equipment are reviewed for impairment when there is an indication that the values of the assets might be impaired. Impairment is determined by reference to the higher of fair value less costs to sell and value in use, measured by assessing risk-adjusted future cash flows discounted using appropriate interest rates. These future cash flows are based on business forecasts and are therefore inherently judgemental. Future events could cause the assumptions used in these impairment reviews to change with a consequent adverse effect on the future results of the Group.
Intangible assets
Where intangible assets are acquired by GSK from third parties the costs of acquisition are capitalised. Licences to compounds in development are amortised from the point at which they are available for use, over their estimated useful lives, which may include periods of non-exclusivity. Estimated useful lives are reviewed annually and impairment tests are undertaken if events occur which call into question the carrying values of the assets. Brands acquired with businesses are capitalised independently where they are separable and have an expected life of more than one year. Brands are amortised over their estimated useful lives, not exceeding 20 years, except where the end of the useful economic life cannot be foreseen. Where brands are not amortised, they are subject to annual impairment tests. Impairment tests are based on risk-adjusted future cash flows discounted using appropriate interest rates. These future cash flows are based on business forecasts and are therefore inherently judgemental. Future events could cause the values of these intangible assets to be impaired and this would have an adverse effect on the future results of the Group.
Pensions and other post-employment benefits
The costs of providing pensions and other post-employment benefits are charged to the income statement in accordance with IAS 19 over the period during which benefit is derived from the employee’s services. The costs are assessed in accordance with advice received from independent actuaries on the basis of assumptions selected by management. These assumptions include future earnings and pension increases, discount rates and expected long term rates of return on assets and are disclosed in Note 28, ‘Pensions and other post-employment benefits’. The expected long term rates of return on bonds are determined based on the portfolio mix of index-linked, government and corporate bonds. An equity risk premium is added to this for equities.
| 98 | GSK Annual Report 2007 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
3 Key accounting judgements and estimates continued
Discount rates are based on appropriate long-term indices, including the iBoxx over 15 year AA index for the UK, and Moody’s Aa index for the USA. Sensitivity analysis is provided in Note 28, ‘Pensions and other post-employment benefits’, but a 0.25% reduction in the discount rate would lead to an increase in the net pension deficit of approximately £374 million and an increase in the annual pension cost of approximately £8 million. The selection of different assumptions could affect the future results of the Group.
The following IFRS and IFRIC interpretations have been issued by the IASB and are likely to affect future Annual Reports, although none is expected to have a material impact on the results or financial position of the Group.
IFRIC11 ‘IFRS 2 – Group and treasury share transactions’ was issued in November 2006 and is required to be implemented by GSK from 1st January 2008. This interpretation provides guidance on whether share-based transactions involving group entities should be accounted for as equity settled or cash settled transactions.
IFRIC 14 ‘IAS 19 – The limit on a defined benefit asset, minimum funding requirements and their interaction’ was issued in July 2007 and will be effective from 1st January 2008. The Interpretation provides general guidance on the amount of a pension surplus that may be recognised as an asset.
IFRS 8 ‘Operating segments’ was issued in November 2006 and is required to be implemented by GSK from 1st January 2009. This standard replaces IAS 14 and aligns the segmental reporting requirements with those of the equivalent US standard. The new standard adopts a ‘management approach’ under which segmental information is to be disclosed on the same basis as that used for internal reporting purposes.
IAS 23 (Revised) ‘Borrowing costs’ was issued in March 2007 and will be implemented prospectively from 1st January 2009. It requires borrowing costs attributable to the acquisition or construction of certain assets to be capitalised. The option currently taken by GSK of expensing such costs as incurred will no longer be available.
IAS 1 (Revised) ‘Presentation of financial statements’ was issued in September 2007 and will be effective from 1st January 2009. The amendments to the Standard mandate various presentation formats and disclosures, many of which are already adopted by GSK. Movements in equity will be presented in a Statement of changes in equity rather than as a Note to the financial statements.
An amendment to IFRS 2 ‘Share-based payment’ relating to vesting conditions and cancellations was issued in January 2008. The amendment will apply retrospectively from 1st January 2009 and specifies that all cancellations of share-based payment arrangements, including those by an employee or other counterparty, should receive the same accounting treatment of requiring immediate recognition in the income statement of the charge that would otherwise have been recognised over the remainder of the service period.
IFRS 3 (Revised) ‘Business combinations’ was issued in January 2008 and will apply to business combinations arising from 1st January 2010. Amongst other changes, the new Standard will require recognition of subsequent changes in the fair value of contingent consideration in the income statement rather than against goodwill, and transaction costs to be recognised immediately in the income statement. Fair value gains or losses on existing investments in an acquired company will be recognised in the income statement at the date of acquisition.
IAS 27 (Revised) ‘Consolidated and separate financial statements’ was issued in January 2008 and will be implemented at the same time as IFRS 3 (Revised). In respect of transactions with non-controlling interests in Group entities that do not result in a change of control, the revised Standard requires that the difference between the consideration paid or received and the recorded non-controlling interest is recognised in equity. In the case of divestment of a subsidiary, any retained interest will be remeasured to fair value and the difference between fair value and the previous carrying value will be recognised immediately in the income statement.
IFRS 3 (Revised) and IAS 27 (Revised) will both be applied prospectively to transactions occurring after the implementation date. It is therefore not possible to assess in advance their impact on the financial statements of the Group.
The Group uses the average of exchange rates prevailing during the period to translate the results and cash flows of overseas subsidiaries, joint ventures and associated undertakings into Sterling and period end rates to translate the net assets of those undertakings. The currencies which most influence these translations and the relevant exchange rates were:
| 2007 | 2006 | 2005 | ||||
| Average rates: | ||||||
| £/US$ | 2.00 | 1.85 | 1.82 | |||
| £/Euro | 1.46 | 1.47 | 1.46 | |||
| £/Yen | 235 | 215 | 200 | |||
| Period end rates: | ||||||
| £/US$ | 1.99 | 1.96 | 1.72 | |||
| £/Euro | 1.36 | 1.48 | 1.46 | |||
| £/Yen | 222 | 233 | 203 | |||
| GSK Annual Report 2007 | 99 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
The Group’s primary segment reporting is by business sector with geographical reporting being the secondary format. The business sectors consist of Pharmaceuticals (prescription pharmaceuticals and vaccines) and Consumer Healthcare (oral care, OTC medicines and nutritional healthcare). The geographical sectors of the USA, Europe and International (other Rest of World markets) reflect the Group’s most significant regional markets and are consistent with the Group’s regional market management reporting structure. Business sector data includes an allocation of corporate costs to each sector on an appropriate basis. There are no sales between business sectors. The Group’s activities are organised on a global basis. The geographical sector figures are therefore influenced by the location of the Group’s operating resources, in particular manufacturing and research, and by variations over time in intra-Group trading and funding arrangements. Turnover is shown by business sector, by location of customer and by location of subsidiary. Operating profit is shown by business sector and by location of subsidiary. Other geographic information is given by location of subsidiary.
| 2007 | 2006 | 2005 | ||||
| Turnover by business sector | £m | £m | £m | |||
| Pharmaceuticals | 19,233 | 20,078 | 18,661 | |||
| Consumer Healthcare | 3,483 | 3,147 | 2,999 | |||
| Turnover | 22,716 | 23,225 | 21,660 | |||
| Profit by business sector | ||||||
| Pharmaceuticals | 6,857 | 7,125 | 6,159 | |||
| Consumer Healthcare | 736 | 683 | 715 | |||
| Operating profit | 7,593 | 7,808 | 6,874 | |||
| Finance income | 262 | 287 | 257 | |||
| Finance costs | (453 | ) | (352 | ) | (451 | ) |
| Share of after tax profits of associates and joint ventures: | ||||||
| Pharmaceuticals | 50 | 56 | 52 | |||
| Consumer Healthcare | – | – | – | |||
| Profit before taxation | 7,452 | 7,799 | 6,732 | |||
| Taxation | (2,142 | ) | (2,301 | ) | (1,916 | ) |
| Profit after taxation for the year | 5,310 | 5,498 | 4,816 | |||
| Investments in associates and joint ventures by business sector | ||||||
| Pharmaceuticals | 329 | 295 | ||||
| Consumer Healthcare | – | – | ||||
| Investment in associates and joint ventures | 329 | 295 | ||||
| Property, plant and equipment and other intangible assets by business sector | ||||||
| Additions | ||||||
| Pharmaceuticals | 2,567 | 1,795 | ||||
| Consumer Healthcare | 322 | 139 | ||||
| Total additions | 2,889 | 1,934 | ||||
| Depreciation/amortisation | ||||||
| Pharmaceuticals | (934 | ) | (849 | ) | ||
| Consumer Healthcare | (88 | ) | (109 | ) | ||
| Total depreciation/amortisation | (1,022 | ) | (958 | ) | ||
| Impairment | ||||||
| Pharmaceuticals | (216 | ) | (241 | ) | ||
| Consumer Healthcare | (2 | ) | (3 | ) | ||
| Total impairment | (218 | ) | (244 | ) | ||
| Impairment reversal | ||||||
| Pharmaceuticals | 67 | 61 | ||||
| Consumer Healthcare | – | – | ||||
| Total impairment reversal | 67 | 61 | ||||
| 100 | GSK Annual Report 2007 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
6 Segment informationcontinued
| 2007 | 2006 | |||||
| Total assets by business sector | £m | £m | ||||
| Pharmaceuticals | 20,231 | 16,936 | ||||
| Consumer Healthcare | 3,177 | 2,768 | ||||
| Total operating assets | 23,408 | 19,704 | ||||
| Investments in associates and joint ventures | 329 | 295 | ||||
| Liquid investments | 1,153 | 1,035 | ||||
| Derivative financial instruments | 476 | 193 | ||||
| Cash and cash equivalents | 3,379 | 2,005 | ||||
| Current and deferred taxation | 2,254 | 2,309 | ||||
| Tangible assets held for sale | 4 | 12 | ||||
| Total assets | 31,003 | 25,553 | ||||
| Total liabilities by business sector | ||||||
| Pharmaceuticals | (7,651 | ) | (8,148 | ) | ||
| Consumer Healthcare | (888 | ) | (951 | ) | ||
| Total operating liabilities | (8,539 | ) | (9,099 | ) | ||
| Short-term borrowings | (3,504 | ) | (718 | ) | ||
| Long-term borrowings | (7,067 | ) | (4,772 | ) | ||
| Derivative financial instruments | (270 | ) | (100 | ) | ||
| Current and deferred taxation | (1,713 | ) | (1,216 | ) | ||
| Total liabilities | (21,093 | ) | (15,905 | ) | ||
| Net assets by business sector | ||||||
| Pharmaceuticals | 12,580 | 8,788 | ||||
| Consumer Healthcare | 2,289 | 1,817 | ||||
| Net operating assets | 14,869 | 10,605 | ||||
| Net debt | (6,039 | ) | (2,450 | ) | ||
| Investments in associates and joint ventures | 329 | 295 | ||||
| Derivative financial instruments | 206 | 93 | ||||
| Current and deferred taxation | 541 | 1,093 | ||||
| Tangible assets held for sale | 4 | 12 | ||||
| Net assets | 9,910 | 9,648 | ||||
| 2007 | 2006 | 2005 | ||||
| Turnover by location of customer | £m | £m | £m | |||
| USA | 10,168 | 11,102 | 9,867 | |||
| Europe | 7,239 | 7,010 | 6,892 | |||
| International | 5,309 | 5,113 | 4,901 | |||
| Turnover | 22,716 | 23,225 | 21,660 | |||
| GSK Annual Report 2007 | 101 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
6 Segment information continued
| 2007 | 2006 | 2005 | ||||
| Turnover by location of subsidiary undertaking | £m | £m | £m | |||
| USA | 10,400 | 11,362 | 10,185 | |||
| Europe | 14,009 | 14,007 | 12,303 | |||
| International | 10,911 | 9,349 | 8,547 | |||
| Turnover including inter-segment turnover | 35,320 | 34,718 | 31,035 | |||
| USA | 341 | 339 | 308 | |||
| Europe | 6,042 | 6,337 | 4,836 | |||
| International | 6,221 | 4,817 | 4,231 | |||
| Inter-segment turnover | 12,604 | 11,493 | 9,375 | |||
| USA | 10,059 | 11,023 | 9,877 | |||
| Europe | 7,967 | 7,670 | 7,467 | |||
| International | 4,690 | 4,532 | 4,316 | |||
| External turnover | 22,716 | 23,225 | 21,660 | |||
| Operating profit by location of subsidiary undertaking | ||||||
| USA | 2,849 | 2,495 | 2,016 | |||
| Europe | 3,671 | 2,701 | 2,798 | |||
| International | 1,073 | 2,612 | 2,060 | |||
| Operating profit | 7,593 | 7,808 | 6,874 | |||
| Property, plant and equipment and other intangible asset additions by location | ||||||
| USA | 1,172 | 637 | ||||
| Europe | 1,456 | 1,020 | ||||
| International | 261 | 277 | ||||
| Total additions | 2,889 | 1,934 | ||||
| Total assets by location | ||||||
| USA | 6,125 | 4,830 | ||||
| Europe | 12,812 | 10,127 | ||||
| International | 5,106 | 5,389 | ||||
| Inter-segment trading balances | (635 | ) | (642 | ) | ||
| Total operating assets | 23,408 | 19,704 | ||||
| 102 | GSK Annual Report 2007 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
6 Segment information continued
| 2007 | 2006 | |||||
| Net operating assets by location | £m | £m | ||||
| USA | 2,385 | 277 | ||||
| Europe | 9,212 | 6,112 | ||||
| International | 3,272 | 4,216 | ||||
| Net operating assets | 14,869 | 10,605 | ||||
UK segment
The UK is included in the Group’s Europe market region.
| 2007 | 2006 | 2005 | ||||
| £m | £m | £m | ||||
| Turnover by location of customer | 1,553 | 1,501 | 1,431 | |||
| Turnover including inter-segment turnover | 4,977 | 4,890 | 4,414 | |||
| Inter-segment turnover | 2,956 | 3,086 | 2,657 | |||
| Turnover by location of subsidiary | 2,021 | 1,804 | 1,757 | |||
| Non-current assets | 4,380 | 3,875 | ||||
| GSK Annual Report 2007 | 103 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
GSK has undertaken a significant new Operational Excellence programme to improve the effectiveness and productivity of its operations. This programme is expected to deliver total annual pre-tax savings of up to £700 million by 2010 with savings realised across the business.
In manufacturing, GSK will reduce the overall number of sites operating in its network and simplify processes and site activities to reduce over-capacity. The Group will also continue to seek opportunities to outsource the manufacturing of existing products and for low-cost sourcing of materials, whilst focusing its capability on new products.
GSK has conducted several sales force pilot initiatives to assess new sales structures and selling techniques. Results from these initiatives have provided GSK with new opportunities to evolve its traditional selling methods competitively, including adopting more tailored and customised sales approaches in both developed and emerging markets.
In R&D, GSK will continue to invest in the development of its promising late-stage pipeline and will increase investment in key areas of future growth, such as biopharmaceuticals, oncology, vaccines, neuroscience and emerging markets such as China. Cost savings in R&D will be focused on simplification and streamlining of support infrastructure.
Total one-off costs for implementation of the new programme are expected to be approximately £1.5 billion, to be incurred over the period from 2007 to 2010.
In addition, in December 2007 GSK acquired Reliant Pharmaceuticals, Inc. in the USA. A rationalisation and restructuring programme has been initiated as part of the integration of Reliant Pharmaceuticals into the Group, although no costs were incured under this programme in 2007.
| Asset | Staff | |||||
| impairment | reductions | Total | ||||
| £m | £m | £m | ||||
| Cost of sales | (77 | ) | (34 | ) | (111 | ) |
| Selling, general and administration | (1 | ) | (136 | ) | (137 | ) |
| Research and development | (28 | ) | (62 | ) | (90 | ) |
| Effect on profit before taxation | (106 | ) | (232 | ) | (338 | ) |
| Effect on taxation | 77 | |||||
| Effect on earnings | (261 | ) | ||||
These restructuring costs are reported in the middle column of the Income statement on page 90.
| 2007 | 2006 | 2005 | ||||
| £m | £m | £m | ||||
| Royalty and milestone income | 223 | 112 | 83 | |||
| Impairment of equity investments | (19 | ) | (14 | ) | (35 | ) |
| Disposal of equity investments | 32 | 18 | 15 | |||
| Disposal of other assets and legal settlements | 181 | 151 | 275 | |||
| Fair value adjustments on derivative financial instruments | 41 | 29 | 19 | |||
| Other income | 17 | 11 | 7 | |||
| 475 | 307 | 364 | ||||
Royalty and milestone income is principally a core of recurring income from the out-licensing of intellectual property. Fair value adjustments on derivative financial instruments include movements on the Quest collar and Theravance put and call options.
| 104 | GSK Annual Report 2007 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
| 2007 | 2006 | 2005 | |||||
| The following items have been included in operating profit: | £m | £m | £m | ||||
| Employee costs (Note 10) | 5,733 | 5,495 | 5,254 | ||||
| Advertising | 744 | 759 | 697 | ||||
| Distribution costs | 270 | 276 | 270 | ||||
| Depreciation of property, plant and equipment | 796 | 732 | 710 | ||||
| Amortisation of intangible assets | 226 | 226 | 194 | ||||
| Net foreign exchange (gains)/losses | (1 | ) | 36 | (3 | ) | ||
| Inventories: | |||||||
| Cost of inventories included in cost of sales | 4,784 | 4,480 | 4,335 | ||||
| Write-down of inventories | 265 | 146 | 119 | ||||
| Reversal of prior year write-down of inventories | (103 | ) | (93 | ) | (61 | ) | |
| Operating lease rentals: | |||||||
| Minimum lease payments | 121 | 114 | 104 | ||||
| Contingent rents | 13 | 11 | 12 | ||||
| Sub-lease payments | 2 | 2 | 1 | ||||
| Fees payable to company’s auditor for the audit of parent company andconsolidated financial statements | 1.8 | 1.7 | 1.4 | ||||
| Fees payable to the company’s auditor and its associates for other services | 14.5 | 15.9 | 13.1 | ||||
The reversals of prior year write-downs of inventories principally arise from the reassessment of usage or demand expectations prior to inventory expiration.
| 2007 | 2006 | 2005 | |||||
| Fees payable to the company’s auditor and its associates for other services | £m | £m | £m | ||||
| Audit of accounts of the Group’s UK and overseas subsidiaries and related pension schemes of the company, pursuant to legislation | 7.9 | 7.7 | 6.7 | ||||
| Other assurance services, pursuant to such legislation | 2.9 | 4.4 | 2.6 | ||||
| Other tax services | 2.5 | 1.9 | 2.3 | ||||
| All other services, including regulatory, compliance and treasury related services | 1.2 | 1.9 | 1.5 | ||||
| 14.5 | 15.9 | 13.1 | |||||
At 31st December 2007, the amount due to PricewaterhouseCoopers LLP and its associates for fees yet to be invoiced was £4.1 million, comprising statutory audit £3.2 million, taxation services £0.6 million and other services £0.3 million.
Fees in respect of the GlaxoSmithKline UK pension schemes included above:
| 2007 | 2006 | 2005 | ||||
| £m | £m | £m | ||||
| Audit | 0.2 | 0.3 | 0.2 | |||
| Other services | 0.1 | 0.1 | – | |||
| 0.3 | 0.4 | 0.2 | ||||
| GSK Annual Report 2007 | 105 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
| 2007 | 2006 | 2005 | ||
| £m | £m | £m | ||
| Wages and salaries | 4,444 | 4,363 | 4,152 | |
| Social security costs | 527 | 461 | 432 | |
| Pension and other post-employment costs, including augmentations (Note 28) | 313 | 377 | 350 | |
| Cost of share-based incentive plans | 237 | 226 | 236 | |
| Severance and other costs from integration and restructuring activities | 212 | 68 | 84 | |
| 5,733 | 5,495 | 5,254 | ||
The Group provides benefits to employees, commensurate with local practice in individual countries, including, in some markets, healthcare insurance, subsidised car schemes and personal life assurance.
| 2007 | 2006 | 2005 | ||
| The average number of persons employed by the Group (including Directors) during the year: | Number | Number | Number | |
| Manufacturing | 33,975 | 32,403 | 30,906 | |
| Selling, general and administration | 53,707 | 53,665 | 53,634 | |
| Research and development | 15,719 | 15,734 | 14,963 | |
| 103,401 | 101,802 | 99,503 | ||
The average number of Group employees excludes temporary and contract staff. The number of Group employees at the end of each financial year are given in the Financial record on page 174. The average number of persons employed by GlaxoSmithKline plc in 2007 was nil (2006 – nil).
The compensation of the Directors and Senior Management (members of the CET and the Company Secretary) in aggregate, was as follows:
| 2007 | 2006 | 2005 | ||
| £m | £m | £m | ||
| Wages and salaries | 16 | 15 | 17 | |
| Social security costs | 1 | 1 | 1 | |
| Pension and other post-employment costs | 3 | 3 | 3 | |
| Cost of share-based incentive plans | 15 | 14 | 15 | |
| 35 | 33 | 36 | ||
| 2007 | 2006 | 2005 | |||
| £m | £m | £m | |||
| Interest income arising from: | |||||
| – cash and cash equivalents | 98 | 168 | 167 | ||
| – available-for-sale investments | 49 | 35 | 15 | ||
| – derivatives at fair value through profit or loss | 79 | 59 | 86 | ||
| – loans and receivables | 27 | 21 | 8 | ||
| Realised gains on liquid investments | 1 | 1 | – | ||
| Fair value adjustments on derivatives at fair value through profit or loss | – | 4 | (2 | ) | |
| Net investment hedge ineffectiveness | 7 | (2 | ) | (17 | ) |
| Unwinding of discounts on assets | 1 | 1 | – | ||
| 262 | 287 | 257 | |||
All derivatives at fair value through profit or loss other than designated and effective hedging instruments (see Note 41, ‘Financial instruments and related disclosures’) are classified as held-for-trading financial instruments under IAS 39. Interest income arising from derivatives at fair value through profit or loss relates to swap interest income.
| 106 | GSK Annual Report 2007 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
| 2007 | 2006 | 2005 | ||||
| £m | £m | £m | ||||
| Interest expense arising on: | ||||||
| – financial liabilities at amortised cost | (313 | ) | (241 | ) | (288 | ) |
| – derivatives at fair value through profit or loss | (121 | ) | (73 | ) | (139 | ) |
| Fair value hedges: | ||||||
| – fair value adjustments on derivatives designated as hedging instruments | 10 | (31 | ) | 79 | ||
| – fair value adjustments on hedged items | (8 | ) | 28 | (77 | ) | |
| Fair value adjustments on other derivatives at fair value through profit or loss | 6 | 1 | (1 | ) | ||
| Unwinding of discounts on provisions | (27 | ) | (36 | ) | (25 | ) |
| (453 | ) | (352 | ) | (451 | ) | |
All derivatives at fair value through profit or loss except designated and effective hedging instruments are classified as held-for-trading financial instruments under IAS 39.
13 Associates and joint ventures
| 2007 | 2006 | 2005 | ||||
| £m | £m | £m | ||||
| Associates: | ||||||
| Share of after tax profits of Quest Diagnostics Inc. | 48 | 59 | 52 | |||
| Share of after tax losses of other associates | (3 | ) | (2 | ) | (1 | ) |
| 45 | 57 | 51 | ||||
| Share of after tax profits/(losses) of joint ventures | 5 | (1 | ) | 1 | ||
| 50 | 56 | 52 | ||||
| Share of turnover of joint ventures | 13 | 21 | 32 | |||
| Sales to joint ventures and associates | 9 | 18 | 48 | |||
Summarised income statement information in respect of the Group’s associates is set out below:
| 2007 | 2006 | 2005 | ||
| £m | £m | £m | ||
| Total turnover | 3,352 | 3,392 | 3,029 | |
| Total profit | 167 | 315 | 296 | |
| GSK Annual Report 2007 | 107 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
| 2007 | 2006 | 2005 | |||||
| Reconciliation of the taxation rate on Group profits | % | % | % | ||||
| UK statutory rate of taxation | 30.0 | 30.0 | 30.0 | ||||
| Overseas taxes | 4.3 | 4.2 | 3.0 | ||||
| Benefit of special tax status | (3.6 | ) | (5.2 | ) | (2.3 | ) | |
| R&D credits | (1.5 | ) | (1.3 | ) | (1.4 | ) | |
| Intercompany stock profit | (0.8 | ) | (1.9 | ) | 1.0 | ||
| Impact of share based payments | 0.6 | 0.5 | (0.3 | ) | |||
| Tax on profit of associates | (0.3 | ) | (0.4 | ) | (0.4 | ) | |
| Other differences | (0.3 | ) | 0.3 | (0.4 | ) | ||
| Prior year items | 0.1 | 3.3 | (0.7 | ) | |||
| Restructuring | 0.2 | – | – | ||||
| Tax rate | 28.7 | 29.5 | 28.5 | ||||
The Group operates in countries where the tax rate differs from the UK tax rate. The impact of these overseas taxes on the company’s overall rate of tax is shown above. Profits arising from certain operations in Singapore, Puerto Rico and Ireland are accorded special status and are taxed at reduced rates compared with the normal rates of tax in these territories. The effect of this reduction in the taxation charge increased earnings per share by 4.9p in 2007, 7.2p in 2006 and 2.7p in 2005.
The Group is required under IFRS to create a deferred tax asset in respect of unrealised intercompany profit arising on inventory held by the Group at the year-end by applying the tax rate of the country in which the inventory is held (rather than the tax rate of the country where the profit was originally made and the tax paid, which is the practice under UK and US GAAP). As a result of this difference in accounting treatment the Group tax rate under IFRS decreased by 0.8% in 2007 (2006 – 1.9% decrease, 2005 – 1.0% increase) as a result of changes in work-in-progress and finished goods.
The integrated nature of the Group’s worldwide operations, involving significant investment in research and strategic manufacture at a limited number of locations, with consequential cross-border supply routes into numerous end-markets, gives rise to complexity and delay in negotiations with revenue authorities as to the profits on which individual Group companies are liable to tax. Resolution of such issues is a continuing fact of life for GSK.
The Group’s main open tax issues are in the UK, the US, Canada and Japan.
GSK continues to be in dispute with HMRC primarily in respect of transfer pricing and Controlled Foreign Companies (‘CFC’) matters for the years 1994 to date. HMRC have not yet formalised claims in respect of these matters and GSK is seeking to resolve them in discussions with HMRC. There continues however to be a wide difference of views between the Group and HMRC positions, which may ultimately need to be settled by litigation.
Following its audit of the period 2001 to 2003, the IRS has in Notices of Proposed Adjustment challenged deductions arising from intercompany financing arrangements for those years, with which GSK disagrees and which it will vigorously contest. GSK estimates that the Inland RevenueIRS claim for tax and interest at 31st December 2007 net of federal tax relief for these years, is $680 million. GSK believes, supported by external professional advice, that this claim has no merit and that no adjustment is warranted. If, contrary to GSK’s view, the IRS prevailed in its argument before a court, the company would expect to have an additional liability for the four year unaudited period 2004-2007 proportionate to its liability for the three year audited period 2001-2003. In the event that the company is not able to resolve this issue with the IRS, a court decision would not be expected before 2010.
Lower courts in Japan have upheld claims by the tax authorities for Yen 39 billion (£177 million) relating to Japanese CFC legislation. The company has paid and fully provided for the full tax but is pursuing a claim for refund to the Japanese Supreme Court. In Canada a court hearing in respect of transfer pricing in the early 1990s was completed in July 2006. GSK is still awaiting the court’s judgement.
| 108 | GSK Annual Report 2007 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
14 Taxationcontinued
GSK uses the best advice in determining its transfer pricing methodology and in seeking to manage transfer pricing and other relevant taxation authorities whereissues to a satisfactory conclusion and, on the basis of external professional advice, continues to believe that it has made adequate provision for the liabilities likely to arise from open issues exist.assessments. The ultimate liability for such matters may vary from the amounts provided and is dependent upon the outcome of litigation proceedings and negotiations with the relevant tax authorities.
Except as shown in this Annual Report, noNo provision has been made for taxation which would arise on the distribution of profits retained by overseas subsidiary and associated undertakings, on the grounds that no remittance of profit retained at 31st December 20042007 is required in such a way that incremental tax will arise.
At 31st December 2004, The aggregate amount of these unremitted profits at the Group had income tax losses ofbalance sheet date was approximately £385 million (2003£31 billion (2006 – £225 million) and capital losses estimated to be in excess of £10 billion (2003 – in excess of £10£26 billion) on which the related.
| Payable | Recoverable | Net | |||||
| Movement on current tax account | £m | £m | £m | ||||
| At 1st January 2007 | (621 | ) | 186 | (435 | ) | ||
| Exchange adjustments | (14 | ) | 3 | (11 | ) | ||
| Charge for the year | (2,002 | ) | (412 | ) | (2,414 | ) | |
| Cash paid | 1,637 | 282 | 1,919 | ||||
| Transfer to/from deferred tax | 122 | – | 122 | ||||
| Other movements | 52 | (1 | ) | 51 | |||
| At 31st December 2007 | (826 | ) | 58 | (768 | ) | ||
| Movement in deferred tax assets and liabilities | ||||||||||||||||||||||||
| Pensions & | Manu-- | Share | Other | |||||||||||||||||||||
| Accelerated | Intra- | other post | Legal | facturing | Stock | option | net | Offset | ||||||||||||||||
| Deferred taxation | capital | group | retirement | Tax | & other | restruct- | valuation | and award | temporary | within | ||||||||||||||
| asset/(liability) | allowances | Intangibles | profit | benefits | losses | disputes | uring | adjustments | schemes | differences | countries | Total | ||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||
Deferred tax asset at1st January 2007 | 24 | 71 | 934 | 742 | 98 | 153 | 74 | 19 | 157 | 598 | (747 | ) | 2,123 | |||||||||||
Deferred tax liability at1st January 2007 | (631 | ) | (555 | ) | – | (4 | ) | – | – | – | (109 | ) | – | (43 | ) | 747 | (595 | ) | ||||||
| At 1st January 2007 | (607 | ) | (484 | ) | 934 | 738 | 98 | 153 | 74 | (90 | ) | 157 | 555 | – | 1,528 | |||||||||
| Exchange adjustments | (11 | ) | (19 | ) | – | (2 | ) | 1 | (2 | ) | 1 | (7 | ) | – | 16 | – | (23 | ) | ||||||
Credit/(charge) to incomestatement | 25 | 65 | 187 | 22 | (17 | ) | 19 | 31 | (12 | ) | (39 | ) | (9 | ) | – | 272 | ||||||||
| Credit/(charge) to equity | – | – | 19 | (195 | ) | – | – | – | – | (17 | ) | 26 | – | (167 | ) | |||||||||
| Transfer to/from current tax | 1 | – | – | (107 | ) | – | – | 2 | – | – | (18 | ) | – | (122 | ) | |||||||||
| Acquisitions | – | (250 | ) | – | – | 55 | – | – | – | – | 16 | – | (179 | ) | ||||||||||
| At 31st December 2007 | (592 | ) | (688 | ) | 1,140 | 456 | 137 | 170 | 108 | (109 | ) | 101 | 586 | – | 1,309 | |||||||||
Deferred tax assets at31st December 2007 | 4 | 94 | 1,140 | 458 | 137 | 170 | 108 | 18 | 101 | 640 | (674 | ) | 2,196 | |||||||||||
Deferred tax liability at31st December 2007 | (596 | ) | (782 | ) | – | (2 | ) | – | – | – | (127 | ) | – | (54 | ) | 674 | (887 | ) | ||||||
| (592 | ) | (688 | ) | 1,140 | 456 | 137 | 170 | 108 | (109 | ) | 101 | 586 | – | 1,309 | ||||||||||
The deferred tax assets are not recognised because therecredit to income relating to changes in tax rates is insufficient evidence that these losses will be used.
| Tax balances | Current | Deferred | Deferred | |||
| tax creditor | tax debtor | tax provision | ||||
| £m | £m | £m | ||||
| At 1st January 2004 | (1,458 | ) | 1,441 | (618 | ) | |
| Exchange adjustments | 67 | (52 | ) | – | ||
| Charge to profit and loss account | (1,667 | ) | 148 | (142 | ) | |
| Cash paid | 1,583 | – | – | |||
| Other movements | (123 | ) | – | 50 | ||
| At 31st December 2004 | (1,598 | ) | 1,537 | (710 | ) | |
| Deferred taxation asset/(liability) | 2003 | |||
| 2004 | (restated) | |||
| £m | £m | |||
| Accelerated capital allowances | (664 | ) | (689 | ) |
| Stock valuation adjustment | (51 | ) | (52 | ) |
| Intra-Group profit | 594 | 485 | ||
| Product and business disposals | (31 | ) | (59 | ) |
| Pensions and other post-retirement benefits | 38 | 113 | ||
| Tax losses | 20 | 94 | ||
| Legal and other disputes | 157 | 167 | ||
| Merger integration and manufacturing restructuring | 89 | 157 | ||
| Other net timing differences | 675 | 607 | ||
| 827 | 823 | |||
Deferred taxation provided on stock valuation adjustments, intra-Group profit and£23 million. All other timing differences shown above are current. All deferred taxationtax movements arise from the origination and reversal of timingtemporary differences. Other net timingtemporary differences include accrued expenses and other provisions.
At 31st December 2007, the Group had recognised a deferred tax asset of £137 million (2006 – £98 million) in respect of income tax losses of approximately £494 million (2006 – £348 million). Of these losses, £136 million (2006 – £100 million) are due to expire between 2008–2012, £3 million (2006 – £nil) are due to expire between 2013–2019, £327 million (2006 – £178 million) are due to expire between 2020–2028 and £28 million (2006 – £70 million) are available indefinitely. At 31st December 2007, the Group had not recognised any deferred tax asset in respect of income tax losses of approximately £3,688 million (2006 – £3,742 million), of which £62 million (2006 – £131 million) are due to expire between 2008–2019, £45 million (2006 – £21 million) are due to expire between 2020–2028 and £3,581 million (2006 – £3,590 million) which are available indefinitely. The Group had capital losses at 31st December 2007 of approximately £9 billion in respect of which no deferred tax asset has been recognised. A substantial part of both income tax and capital losses are still subject to agreement by relevant tax authorities. Deferred tax assets are recognised where it is probable that future taxable profit will be available to utilise losses.
| GSK Annual Report 2007 | 109 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| 2003 | 2002 | |||||
| 2004 | (restated) | (restated) | ||||
| p | p | p | ||||
| Basic earnings per share | 75.0 | 77.1 | 66.5 | |||
| Adjustment for merger items, restructuring costs and disposal of subsidiaries: | ||||||
| Merger integration and transaction costs | – | 3.8 | 10.8 | |||
| Restructuring costs | – | 1.0 | 1.5 | |||
| Block Drug integration costs | – | 0.3 | 0.7 | |||
| Disposal of businesses | – | (0.2 | ) | (0.9 | ) | |
| Adjusted earnings per share | 75.0 | 82.0 | 78.6 | |||
| Diluted earnings per share | 74.8 | 76.9 | 66.3 | |||
| 2007 | 2006 | 2005 | |||||
| pence | pence | pence | |||||
| Basic earnings per share | 94.4 | 95.5 | 82.6 | ||||
| Adjustment for restructuring costs | 4.7 | ||||||
| Business performance earnings per share (basic) | 99.1 | ||||||
| Diluted earnings per share | 93.7 | 94.5 | 82.0 | ||||
| Adjustment for restructuring costs | 4.6 | ||||||
| Business performance earnings per share (diluted) | 98.3 | ||||||
Basic and adjusted earnings per share have been calculated by dividing the profit attributable to shareholders by the weighted average number of shares in issue during the period.period after deducting shares held by the ESOP Trusts and Treasury shares.
Adjusted earnings per share is calculated using business performance earnings. The calculation of business performance, a supplemental non-IFRS measure, is described in Note 1 ‘Presentation of the financial statements’.
Diluted earnings per share have been calculated after adjusting the weighted average number of shares used in the basic calculation to assume the conversion of all potentially dilutive shares. A potentially dilutive share forms part of the employee share schemes where its exercise price is below the average market price of GSK shares during the period and any performance conditions attaching to the scheme have been met at the balance sheet date.
The numbers of shares used in calculating basic and diluted earnings per share are reconciled below.
Adjusted earnings per share is calculated using business performance earnings. During the years 2000 to 2003, business performance was the primary performance measure used by management and was presented after excluding merger items, integration and restructuring costs and disposals of businesses, as management believed that exclusion of these items provided a better comparison of business performance for the periods presented. For 2004, with the completion of these programmes, the Group is reporting results on a statutory basis only. This information, which is provided in addition to the statutory results prepared under UK GAAP, is given to assist shareholders to gain a clearer understanding of the underlying performance of the business and to increase comparability for the periods presented.
| Net profit for the period attributable to shareholders | £m | £m | £m | |||
| Earnings – basic and diluted | 4,302 | 4,478 | 3,930 | |||
| Adjustments for merger items, restructuring costs and disposal of subsidiaries | – | 281 | 712 | |||
| Adjusted earnings | 4,302 | 4,759 | 4,642 | |||
| Weighted average number of shares in issue | millions | millions | millions | |||
| Basic and adjusted | 5,736 | 5,806 | 5,912 | |||
| Dilution for share options | 12 | 18 | 22 | |||
| Diluted | 5,748 | 5,824 | 5,934 | |||
| 2007 | 2006 | 2005 | |||||
| Weighted average number of shares in issue | millions | millions | millions | ||||
| Basic | 5,524 | 5,643 | 5,674 | ||||
| Dilution for share options | 43 | 57 | 46 | ||||
| Diluted | 5,567 | 5,700 | 5,720 | ||||
Shares held by the ESOP Trusts are excluded. The trustees have waived their rights to dividends on the shares held by the ESOP Trusts.
| 14 Dividends | 2004 | 2003 | 2002 | |||
| £m | £m | £m | ||||
| First interim | 575 | 524 | 535 | |||
| Second interim | 573 | 522 | 530 | |||
| Third interim | 571 | 520 | 527 | |||
| Fourth interim | 683 | 808 | 754 | |||
| 2,402 | 2,374 | 2,346 | ||||
| Dividends per share | 2004 | 2003 | 2002 | |||
| p | p | p | ||||
| First interim | 10 | 9 | 9 | |||
| Second interim | 10 | 9 | 9 | |||
| Third interim | 10 | 9 | 9 | |||
| Fourth interim | 12 | 14 | 13 | |||
| 42 | 41 | 40 | ||||
| 2007 | First interim | Second interim | Third interim | Fourth interim | Total | ||||||
| Total dividend (£m) | 670 | 667 | 708 | 860 | 2,905 | ||||||
| Dividend per share (pence) | 12 | 12 | 13 | 16 | 53 | ||||||
| Paid/payable | 12th July 2007 | 11th October 2007 | 10th January 2008 | 10th April 2008 | |||||||
| 2006 | |||||||||||
| Total dividend (£m) | 619 | 620 | 671 | 785 | 2,695 | ||||||
| Dividend per share (pence) | 11 | 11 | 12 | 14 | 48 | ||||||
| Paid | 6th July 2006 | 5th October 2006 | 4th January 2007 | 12th April 2007 | |||||||
| 2005 | |||||||||||
| Total dividend (£m) | 568 | 567 | 568 | 791 | 2,494 | ||||||
| Dividend per share (pence) | 10 | 10 | 10 | 14 | 44 | ||||||
| Paid | 7th July 2005 | 6th October 2005 | 5th January 2006 | 6th April 2006 | |||||||
Under IFRS interim dividends are only recognised in the financial statements when paid and not when declared. GSK normally pays a dividend two quarters after the quarter to which it relates and one quarter after it is declared. The 2007 financial statements recognise those dividends paid in 2007, namely the third and fourth interim dividends for 2006 and the first and second interim dividends for 2007. The amounts recognised in each year are as follows:
| 2007 | 2006 | 2005 | |||||
| £m | £m | £m | |||||
| Dividends to shareholders | 2,793 | 2,598 | 2,390 | ||||
| 110 | GSK Annual Report 2007 |
| Notes to the financial statements |
| Notes to the financial statements | ||
| continued | ||
| 16 Other intangible assets | Licences, | |||||
| patents, etc. | Brands | Total | ||||
| £m | £m | £m | ||||
| Cost at 1st January 2004 | 838 | 1,169 | 2,007 | |||
| Exchange adjustments | (24 | ) | (25 | ) | (49 | ) |
| Additions | 462 | – | 462 | |||
| Disposals | (1 | ) | (1 | ) | (2 | ) |
| Assets written off | (19 | ) | – | (19 | ) | |
| Cost at 31st December 2004 | 1,256 | 1,143 | 2,399 | |||
| Amortisation at 1st January 2004 | (229 | ) | – | (229 | ) | |
| Exchange adjustments | 7 | – | 7 | |||
| Provision for the year | (94 | ) | – | (94 | ) | |
| Disposals | 1 | – | 1 | |||
| Assets written off | 1 | – | 1 | |||
| Amortisation at 31st December 2004 | (314 | ) | – | (314 | ) | |
| Impairment at 1st January 2004 | (58 | ) | (23 | ) | (81 | ) |
| Exchange adjustments | 1 | 1 | 2 | |||
| Impairment loss | (4 | ) | – | (4 | ) | |
| Disposals | – | 1 | 1 | |||
| Impairment at 31st December 2004 | (61 | ) | (21 | ) | (82 | ) |
| Total amortisation and impairment at 31st December 2004 | (375 | ) | (21 | ) | (396 | ) |
| Net book value at 1st January 2004 | 551 | 1,146 | 1,697 | |||
| Net book value at 31st December 2004 | 881 | 1,122 | 2,003 | |||
17 Property, plant and equipment
| Plant, | ||||||||
| Land and | equipment | Assets in | ||||||
| buildings | and vehicles | construction | Total | |||||
| £m | £m | £m | £m | |||||
| Cost at 1st January 2006 | 4,281 | 7,887 | 1,022 | 13,190 | ||||
| Exchange adjustments | (232 | ) | (295 | ) | (65 | ) | (592 | ) |
| Additions | 100 | 403 | 982 | 1,485 | ||||
| Additions through business combinations | – | 5 | – | 5 | ||||
| Disposals and write-offs | (44 | ) | (578 | ) | (5 | ) | (627 | ) |
| Reclassifications | 153 | 358 | (511 | ) | – | |||
| Transfer to assets held for sale | (14 | ) | (4 | ) | – | (18 | ) | |
| Cost at 31st December 2006 | 4,244 | 7,776 | 1,423 | 13,443 | ||||
| Exchange adjustments | 143 | 229 | 61 | 433 | ||||
| Additions | 140 | 401 | 1,042 | 1,583 | ||||
| Additions through business combinations | 1 | 7 | – | 8 | ||||
| Disposals and write-offs | (20 | ) | (309 | ) | (16 | ) | (345 | ) |
| Reclassifications | 134 | 418 | (552 | ) | – | |||
| Transfer to assets held for sale | (8 | ) | (25 | ) | (2 | ) | (35 | ) |
| Cost at 31st December 2007 | 4,634 | 8,497 | 1,956 | 15,087 | ||||
| Depreciation at 1st January 2006 | (1,290 | ) | (4,915 | ) | – | (6,205 | ) | |
| Exchange adjustments | 73 | 196 | – | 269 | ||||
| Provision for the year | (137 | ) | (595 | ) | – | (732 | ) | |
| Disposals and write-offs | 23 | 506 | – | 529 | ||||
| Transfer to assets held for sale | 6 | 3 | – | 9 | ||||
| Depreciation at 31st December 2006 | (1,325 | ) | (4,805 | ) | – | (6,130 | ) | |
| Exchange adjustments | (45 | ) | (125 | ) | – | (170 | ) | |
| Provision for the year | (177 | ) | (619 | ) | – | (796 | ) | |
| Disposals and write-offs | 10 | 242 | – | 252 | ||||
| Transfer to assets held for sale | 3 | 17 | – | 20 | ||||
| Depreciation at 31st December 2007 | (1,534 | ) | (5,290 | ) | – | (6,824 | ) | |
| Impairment at 1st January 2006 | (146 | ) | (162 | ) | (25 | ) | (333 | ) |
| Exchange adjustments | 13 | 4 | 3 | 20 | ||||
| Disposals and write-offs | 12 | 10 | 2 | 24 | ||||
| Impairment losses | (46 | ) | (107 | ) | (2 | ) | (155 | ) |
| Reversal of impairments | 26 | 24 | 11 | 61 | ||||
| Impairment at 31st December 2006 | (141 | ) | (231 | ) | (11 | ) | (383 | ) |
| Exchange adjustments | (2 | ) | (3 | ) | (1 | ) | (6 | ) |
| Disposals and write-offs | 7 | 32 | 5 | 44 | ||||
| Impairment losses | (29 | ) | (53 | ) | (82 | ) | (164 | ) |
| Reversal of impairments | 43 | 16 | 8 | 67 | ||||
| Impairment at 31st December 2007 | (122 | ) | (239 | ) | (81 | ) | (442 | ) |
| Total depreciation and impairment at 31st December 2006 | (1,466 | ) | (5,036 | ) | (11 | ) | (6,513 | ) |
| Total depreciation and impairment at 31st December 2007 | (1,656 | ) | (5,529 | ) | (81 | ) | (7,266 | ) |
| Net book value at 1st January 2006 | 2,845 | 2,810 | 997 | 6,652 | ||||
| Net book value at 31st December 2006 | 2,778 | 2,740 | 1,412 | 6,930 | ||||
| Net book value at 31st December 2007 | 2,978 | 2,968 | 1,875 | 7,821 | ||||
The net book value at 31st December 2007 of the Group’s land and buildings comprises freehold properties £2,752 million (2006 – £2,632 million), properties with leases of 50 years or more £168 million (2006 – £116 million) and properties with leases of less than 50 years £58 million (2006 – £30 million).
| GSK Annual Report 2007 | 111 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
17 Property, plant and equipmentcontinued
Included in land and buildings at 31st December 2007 are leased assets with a cost of £424 million (2006 – £241 million), accumulated depreciation of £198 million (2006 – £95 million) and a net book value of £226 million (2006 – £146 million). Included in plant, equipment and vehicles at 31st December 2007 are leased assets with a cost of £180 million (2006 – £263 million), accumulated depreciation of £81 million (2006 – £97 million), and a net book value of £99 million (at 1st January 2007 – £166 million). Some lease agreements include renewal or purchase options or escalation clauses.
The impairment losses principally arise from decisions to rationalise facilities and are calculated based on either fair value less costs to sell or value in use. The value in use calculations determine the net present value of the projected risk-adjusted, post-tax cash flows of the relevant asset or cash generating unit, applying a discount rate of the Group post-tax weighted average cost of capital of 8%, adjusted where appropriate for country specific risks. Where an impairment is indicated a pre-tax cash flow calculation is expected to give a materially different result, the test would be reperformed using pre-tax cash flows and a pre-tax discount rate. The impairment losses have been charged through cost of sales (£117 million), R&D (£44 million) and SG&A (£3 million).
Reversals of impairment arise from subsequent reviews of the impaired assets where the conditions which gave rise to the original impairments are deemed no longer to apply. All of the reversals have been credited to cost of sales. The principal component of the 2007 reversals relates to the Suzhou pharmaceuticals manufacturing facility, where a planned withdrawal of manufacturing of a key product has been terminated. The recoverable amount has been calculated by applying a value in use calculation and a 12% discount rate.
| 2007 | 2006 | |||
| £m | £m | |||
| Cost at 1st January | 758 | 696 | ||
| Exchange adjustments | 81 | (54 | ) | |
| Additions through business combinations | 533 | 126 | ||
| Impairments | (2 | ) | (10 | ) |
| Cost at 31st December | 1,370 | 758 | ||
| Net book value at 1st January | 758 | 696 | ||
| Net book value at 31st December | 1,370 | 758 | ||
The additions for the year comprise £350 million on the acquisition of Reliant Pharmaceuticals, Inc., £181 million on the acquisition of Domantis Limited and £2 million on the acquisition of Praecis Pharmaceuticals Inc. See Note 38, ‘Acquisitions and disposals’ for further details.
The impairments in the year of £2 million relate to the Europharm business located in Romania and were determined using the fair value less costs to sell model.
The carrying value of goodwill is made up of balances arising on acquisition of the following companies:
| 2007 | 2006 | |||
| £m | £m | |||
| ID Biomedical Corporation | 367 | 316 | ||
| Reliant Pharmaceuticals, Inc. | 356 | – | ||
| Domantis Limited | 181 | – | ||
| CNS, Inc. | 111 | 112 | ||
| GlaxoSmithKline K.K. | 140 | 134 | ||
| Polfa Poznan S.A. | 111 | 96 | ||
| Corixa Corporation | 24 | 25 | ||
| Others | 80 | 75 | ||
| 1,370 | 758 | |||
Goodwill is allocated to cash generating units which are tested for impairment at least annually. The recoverable amounts of the cash generating units are assessed using a value in use or a fair value less costs to sell model, depending on the nature of the unit. Value in use is calculated as the net present value of the projected risk-adjusted, five-year post-tax cash flows plus a terminal value of the cash generating unit to which the goodwill is allocated. Initially a post-tax discount rate based on the Group’s weighted average cost of capital of 8%, adjusted where appropriate for country specific risks, is applied to calculate the net present value of the post-tax cash flows. Where this indicates that the recoverable value of the unit is close to or below its carrying value, the impairment test is reperformed using a pre-tax discount rate and pre-tax cash flows in order to determine if an impairment exists and to establish its magnitude. Fair value is calculated using a discounted cash flow approach, which in this case is based on the Group’s acquisition valuation model. A post-tax discount rate based on the Group’s weighted average cost of capital is applied, adjusted where appropriate for country specific risks. This rate is applied to projected risk-adjusted post-tax cash flows.
| 112 | GSK Annual Report 2007 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
18 Goodwillcontinued
The cash generating units for which the carrying amount of goodwill allocated to the unit is significant in comparison with the total goodwill balance are Vaccines, Consumer Healthcare, US Pharmaceuticals, worldwide Pharmaceuticals, Japan and Poland. Total goodwill of £414 million (2006 – £362 million), principally relating to the acquisitions of ID Biomedical and Corixa, is allocated to the Vaccines unit. The recoverable value of this unit is determined using the fair value less costs to sell model. Goodwill arising on the acquisition of the minority interest in GlaxoSmithKine K.K. of £140 million (2006 – £134 million) and on the acquisition of Polfa Poznan of £111 million (2006 – £96 million) is allocated to the Japan and Poland cash generating units respectively. The recoverable value of both these units is determined using the value in use model. Goodwill arising on the acquisition of CNS, Inc. in December 2006 is allocated to the Consumer Healthcare cash generating unit. As Domantis Limited is a research operation, the goodwill arising on the acquisition has been allocated to the worldwide Pharmaceuticals cash generating unit. Goodwill arising on the acquisition of Reliant Pharmaceuticals, Inc. in December 2007 is allocated to the US Pharmaceuticals cash generating unit.
| Computer | Licences, | Amortised | Indefinite life | |||||||
| software | patents, etc. | brands | brands | Total | ||||||
| £m | £m | £m | £m | £m | ||||||
| Cost at 1st January 2006 | 685 | 2,399 | 73 | 1,184 | 4,341 | |||||
| Exchange adjustments | (23 | ) | (204 | ) | (9 | ) | (62 | ) | (298 | ) |
| Additions | 90 | 138 | – | – | 228 | |||||
| Additions through business combinations | – | 29 | – | 187 | 216 | |||||
| Disposals and asset write-offs | (37 | ) | (80 | ) | – | – | (117 | ) | ||
| Cost at 31st December 2006 | 715 | 2,282 | 64 | 1,309 | 4,370 | |||||
| Exchange adjustments | 9 | 128 | (1 | ) | 44 | 180 | ||||
| Additions | 85 | 339 | 203 | – | 627 | |||||
| Additions through business combinations | 1 | 670 | – | – | 671 | |||||
| Disposals and asset write-offs | (8 | ) | (26 | ) | – | – | (34 | ) | ||
| Transfer to assets held for sale | (1 | ) | – | – | – | (1 | ) | |||
| Cost at 31st December 2007 | 801 | 3,393 | 266 | 1,353 | 5,813 | |||||
| Amortisation at 1st January 2006 | (399 | ) | (381 | ) | (4 | ) | – | (784 | ) | |
| Exchange adjustments | 13 | 37 | 1 | – | 51 | |||||
| Provision for the year | (87 | ) | (138 | ) | (1 | ) | – | (226 | ) | |
| Disposals and asset write-offs | 29 | 7 | – | – | 36 | |||||
| Amortisation at 31st December 2006 | (444 | ) | (475 | ) | (4 | ) | – | (923 | ) | |
| Exchange adjustments | (8 | ) | (13 | ) | (1 | ) | – | (22 | ) | |
| Provision for the year | (80 | ) | (141 | ) | (5 | ) | – | (226 | ) | |
| Disposals and asset write-offs | 1 | 7 | – | – | 8 | |||||
| Transfer to assets held for sale | 1 | – | – | – | 1 | |||||
| Amortisation at 31st December 2007 | (530 | ) | (622 | ) | (10 | ) | – | (1,162 | ) | |
| Impairment at 1st January 2006 | (23 | ) | (127 | ) | – | (24 | ) | (174 | ) | |
| Exchange adjustments | – | 29 | – | 3 | 32 | |||||
| Impairment losses | (9 | ) | (80 | ) | – | – | (89 | ) | ||
| Disposals and asset write-offs | 8 | 69 | – | – | 77 | |||||
| Impairment at 31st December 2006 | (24 | ) | (109 | ) | – | (21 | ) | (154 | ) | |
| Exchange adjustments | – | (6 | ) | – | – | (6 | ) | |||
| Impairment losses | – | (54 | ) | – | – | (54 | ) | |||
| Disposals and asset write-offs | – | 19 | – | – | 19 | |||||
| Impairment at 31st December 2007 | (24 | ) | (150 | ) | – | (21 | ) | (195 | ) | |
| Total amortisation and impairment at 31st December 2006 | (468 | ) | (584 | ) | (4 | ) | (21 | ) | (1,077 | ) |
| Total amortisation and impairment at 31st December 2007 | (554 | ) | (772 | ) | (10 | ) | (21 | ) | (1,357 | ) |
| Net book value at 1st January 2006 | 263 | 1,891 | 69 | 1,160 | 3,383 | |||||
| Net book value at 31st December 2006 | 247 | 1,698 | 60 | 1,288 | 3,293 | |||||
| Net book value at 31st December 2007 | 247 | 2,621 | 256 | 1,332 | 4,456 | |||||
| GSK Annual Report 2007 | 113 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
| 19 Other intangible assetscontinued | ||||
| Amortisation and impairment have been charged in the income statement as follows: | ||||
| Amortisation | Impairment | |||
| £m | £m | |||
| Cost of sales | 32 | – | ||
| Selling, general and administration | 123 | 3 | ||
| Research and development | 71 | 51 | ||
| Total amortisation and impairment | 226 | 54 | ||
The additions to licences and patentsthrough business combinations in the year relate to the purchases of £671 million include £603 million in respect ofFraxiparine Lovaza, acquired with the acquisition of Reliant Pharmaceuticals (see Note 38, ‘Acquisitions and Arixtra productdisposals’). Included within other additions are internally generated costs of £41 million (2006 – £25 million) relating to computer software and £6 million (2006 – £nil) relating to other intangible assets. At 31st December 2007, the net book value included £136 million (2006 – £112 million) of internally generated costs of which £130 million (2006 – £112 million) related to computer software and £6 million (2006 – £nil) related to other intangible assets.
Amortised brands include OTC rights from Sanofi-Synthelabo, the OTC marketing rights for orlistatrelating toalli, acquired from Roche, and various other compound rights (see Note 26)of £249 million (2006 – £51 million).
Brands largelyIndefinite life brands comprise a portfolio of products acquired with the acquisitionacquisitions of Sterling Winthrop, Inc. in 1994, such as Panadol, Solpadeine and Hedex, and the products acquired with the acquisition of The Block Drug Company, Inc. in 2001 suchand CNS, Inc. in 2006. The book values of the major brands are as Sensodyne, Polident and Poligrip. follows:
| 2007 | 2006 | |||
| £m | £m | |||
| Panadol | 330 | 317 | ||
| Sensodyne | 231 | 220 | ||
| Breathe Right | 165 | 169 | ||
| Polident | 98 | 93 | ||
| Corega | 87 | 83 | ||
| Poligrip | 60 | 57 | ||
| Solpadeine | 57 | 56 | ||
| Others | 304 | 293 | ||
| 1,332 | 1,288 | |||
Each of these brands is considered to have an indefinite life, given the strength and durability of the brand and the level of marketing support. The brands are in relatively similar stable and profitable market sectors, with similar risk profiles, and their size, diversification and market shares mean that the risk of market-related factors causing a reduction in the lives of the brands is considered to be relatively low. The Group is not aware of any material legal, regulatory, contractual, competitive, economic or other factor which could limit their useful lives. Accordingly, they are not amortised. The valuation of each Sterling
Each brand is reviewedtested annually for impairment applying a fair value less costs to sell methodology, using a 10five year post-tax cash flow forecast as this was the basis for the original independent assessment when they were acquired in 1994 and a post-tax discount rate of eight per cent. The valuation of each Block Drug brand is also reviewed annually using a five year cash flow forecast and a post-tax discount rate of eight per cent.
17 Tangible fixed assets Plant, Land and equipment Computer Assets in buildings and vehicles software construction Total £m £m £m £m £m Cost at 1st January 2004 3,999 7,206 431 768 12,404 Exchange adjustments (78 ) (91 ) (6 ) (3 ) (178 ) Additions 91 363 8 531 993 Disposals (61 ) (270 ) (13 ) (6 ) (350 ) Reclassifications 113 291 133 (537 ) – Cost at 31st December 2004 4,064 7,499 553 753 12,869 Depreciation at 1st January 2004 (1,112 ) (4,276 ) (239 ) – (5,627 ) Exchange adjustments 25 63 4 – 92 Provision for the year (122 ) (569 ) (94 ) – (785 ) Disposals 29 215 12 – 256 Reclassifications 8 (6 ) (2 ) – – Depreciation at 31st December 2004 (1,172 ) (4,573 ) (319 ) – (6,064 ) Impairment at 1st January 2004 (129 ) (157 ) (22 ) (28 ) (336 ) Exchange adjustments 4 2 – – 6 Impairment loss (17 ) (9 ) (2 ) – (28 ) Disposals 6 17 – 1 24 Impairment at 31st December 2004 (136 ) (147 ) (24 ) (27 ) (334 ) Total depreciation and impairment at 31st December 2004 (1,308 ) (4,720 ) (343 ) (27 ) (6,398 ) Net book value at 1st January 2004 2,758 2,773 170 740 6,441 Net book value at 31st December 2004 2,756 2,779 210 726 6,471
The net book value at 31st December 2004 of the Group’s land and buildings comprises freehold properties £2,557 million (at 1st January 2004 – £2,532 million), properties with leases of 50 years or more £143 million (at 1st January 2004 – £182 million) and properties with leases of less than 50 years £56 million (at 1st January 2004 – £44 million). Included in plant, equipment and vehicles at 31st December 2004 are leased assetsforecasts with a cost of £93 million (at 1st January 2004 – £3 million), accumulated depreciation of £25 million (at 1st January 2004 – £2 million)terminal value calculation and a net book value of £68 million (at 1st January 2004 – £1 million).
The impairment loss principally arises from decisions to rationalise facilities and is calculated based on either net realisable value or value in use, typically using a discount rate equal to the Group post-tax weighted average cost of eight per cent.
| 18 Fixed asset investments | Joint | Associated | Equity | |||||
| ventures | undertakings | investments | Total | |||||
| £m | £m | £m | £m | |||||
| At 1st January 2004 | 13 | 183 | 98 | 294 | ||||
| Exchange adjustments | – | (14 | ) | (5 | ) | (19 | ) | |
| Additions | – | 2 | 84 | 86 | ||||
| Impairment | – | – | (20 | ) | (20 | ) | ||
| Transfers | – | (1 | ) | (4 | ) | (5 | ) | |
| Disposals | – | (31 | ) | (8 | ) | (39 | ) | |
| Retained profit for the year | (1 | ) | 41 | – | 40 | |||
| Goodwill amortisation | – | (5 | ) | – | (5 | ) | ||
| At 31st December 2004 | 12 | 175 | 145 | 332 | ||||
Investmentscapital of 8%, adjusted where appropriate for country-specific risks. The main assumptions include future sales prices and volumes, product contribution, the future expenditure required to maintain the product’s marketability and registration in joint ventures comprise £14 million sharethe relevant jurisdiction and the product’s useful economic life. These assumptions are reviewed as part of gross assets (2003 – £15 million)management’s budgeting and £2 million share of gross liabilities (2003 – £2 million).strategic planning cycle for changes in market conditions and sales erosion through competition.
The principal associated undertaking is Quest Diagnostics Inc., a US clinical laboratory business listed on the New York Stock Exchange. The investment hashad a book value at 31st December 20042007 of £153£299 million (2003(2006 – £158£262 million) and a market value of £908£970 million (2003(2006 – £904£987 million).
At 31st December 2004,2007, the Group owned 18.6 per cent18.9% of Quest (2003(2006 – 21 per cent)18.7%) . The book value includes goodwill which is being amortised over 20 years;Although the amortisation charge for 2004 was £5 million (2003 – £6 million). The goodwill at 31st December 2004 amountsGroup holds less than 20% of the ownership interest and voting control in Quest, the Group has the ability to £61 million (2003 – £85 million). Goodwillexercise significant influence through both its significant shareholding and its nominated director’s active participation on the Quest Board of £80 million which relates to the continuing Group interest in Clinical Laboratories assets attributed to Quest, remains eliminated against Group reserves. Equity investments comprise listed investments of £91 million (2003 – £7 million)Directors and unlisted investments of £54 million (2003 – £91 million). The market value of listed investments at 31st December 2004 was £98 million (2003 – £9 million).Board sub-committees.
| 114 | GSK Annual Report 2007 |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
20 Investments in associates and joint venturescontinued
| Summarised balance sheet information in respect of the Group’s associates is set out below: | ||||
| 2007 | 2006 | |||
| £m | £m | |||
| Total assets | 4,342 | 2,930 | ||
| Total liabilities | (2,634 | ) | (1,350 | ) |
| Net assets | 1,708 | 1,580 | ||
| Group’s share of associates’ net assets | 314 | 279 | ||
Investments in joint ventures comprise £21 million share of gross assets (2006 – £22 million) and £6 million share of gross liabilities (2006 – £6 million). These principally arise from 50% interests in two joint ventures, Shionogi-GlaxoSmithKline Holdings, L.P., which is developing specified chemical compounds, and GlaxoSmithKline Shire Canada, which primarily co-marketsCombivir,Trizivir andEpivir in certain territories, together with a 30% interest in another joint venture, Pharmaceutical Insurance Limited, which is a mutual insurance company covering pharmaceutical property risk.
In 2002, GSK hedged part of the equity value of its holding in Quest Diagnostics Inc. through a series of variable sale forward contracts. The contracts (‘the equity collar’) were renewed in 2006 and are structured in five series, each over two million Quest shares, and mature between 2010 and 2012. The fair value of the contracts at 31st December 2007 was a liability of $4 million (2006 – $24 million).
A second series of hedging contracts over an additional 10 million shares was entered into on 15th February 2007. These contracts are also structured in five series, each over two million Quest shares, and mature between 2013 and 2015. The fair value of the contracts at 31st December 2007 was an asset of $15 million.
| 21 Other investments | ||||
| 2007 | 2006 | |||
| £m | £m | |||
| At 1st January | 441 | 362 | ||
| Exchange adjustments | 12 | (45 | ) | |
| Additions | 206 | 57 | ||
| Net fair value movements | (67 | ) | 116 | |
| Impairments | (31 | ) | (16 | ) |
| Disposals | (44 | ) | (33 | ) |
| At 31st December | 517 | 441 | ||
Other investments comprise non-current equity investments which are available-for-sale investments recorded at fair value at each balance sheet date. For investments traded in an active market, the fair value is determined by reference to the relevant stock exchange quoted bid price. For other investments, the fair value is estimated by reference to the current market value of similar instruments or by reference to the discounted cash flows of the underlying net assets. Equity investments are recorded as non-current assets unless they are expected to be sold within one year, in which case they are recorded as current assets.
The Group holds a number of equity investments in entities where the Group has entered into research collaborations. Other investments include listed investments of £413 million (2006 – £348 million) that offer the Group the opportunity for return through dividend income and fair value gains.
On disposal of investments, fair value movements are reclassified from reserves to the income statement based on average cost.
The impairment losses recorded in the tables above have been recognised in the income statement for the year within other operating income, together with amounts recycled from the fair value reserve (Note 8, ‘Other operating income’) on recognition of the impairments. These impairments initially result from prolonged or significant declines in the fair value of the equity investments below acquisition cost, subsequent to which any further declines in fair value are immediately taken to the income statement. At 31st December 2007 impaired assets with a fair value of £97 million (2006 – £117 million) are included in other investments.
| 22 Other non-current assets | ||||
| 2007 | 2006 | |||
| £m | £m | |||
| Amounts recoverable under insurance contracts | 271 | 262 | ||
| Pension schemes in surplus | 255 | 179 | ||
| Other receivables | 161 | 167 | ||
| 687 | 608 | |||
| GSK Annual Report 2007 | 115 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
| 23 Inventories | ||||
| 2007 | 2006 | |||
| £m | £m | |||
| Raw materials and consumables | 1,105 | 764 | ||
| Work in progress | 771 | 626 | ||
| Finished goods | 1,186 | 1,047 | ||
| 3,062 | 2,437 | |||
| 2007 | 2006 | |||
| Bad and doubtful debt provision | £m | £m | ||
| At 1st January | 104 | 140 | ||
| Exchange adjustments | 6 | (9 | ) | |
| Charge for the year | 18 | 12 | ||
| Subsequent recoveries of amounts provided for | (28 | ) | (38 | ) |
| Utilised | (2 | ) | (1 | ) |
| At 31st December | 98 | 104 | ||
| 25 Cash and cash equivalents | ||||
| 2007 | 2006 | |||
| £m | £m | |||
| Cash at bank and in hand | 627 | 620 | ||
| Short-term deposits | 2,383 | 1,324 | ||
| Commercial paper | 369 | 61 | ||
| 3,379 | 2,005 | |||
| 26 Assets held for sale | ||||
| 2007 | 2006 | |||
| £m | £m | |||
| Land and buildings | 3 | 8 | ||
| Plant, equipment and vehicles | 1 | 1 | ||
| Equity investments | – | 3 | ||
| 4 | 12 | |||
| 116 | GSK Annual Report 2007 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| continued | |
27 Trade and other payables continued
Customer return and rebate accruals are provided for by the Group at the point of sale in respect of the estimated rebates, discounts or allowances payable to customers, principally in the USA. Provisions are made at the time of sale but the actual amounts paid are based on claims made some time after the initial recognition of the sale. As the amounts are estimated they may not fully reflect the final outcome and the amounts are subject to change dependent upon, amongst other things, the types of buying group and product sales mix. The level of provision is reviewed and adjusted quarterly in the light of historical experience of actual rebates, discounts or allowances given and returns made and any changes in arrangements. Future events could cause the assumptions on which the provisions are based to change, which could affect the future results of the Group.
28 Pensions and other post-employment benefits
| 2007 | 2006 | 2005 | ||||
| Pension and other post-employment costs | £m | £m | £m | |||
| UK pension schemes | 108 | 159 | 124 | |||
| US pension schemes | 24 | 35 | 41 | |||
| Other overseas pensions schemes | 89 | 91 | 83 | |||
| Unfunded post-retirement healthcare schemes | 90 | 91 | 100 | |||
| Other post-employment costs | 2 | 1 | 2 | |||
| 313 | 377 | 350 | ||||
| Analysed as: | ||||||
| Funded defined benefit/hybrid pension schemes | 171 | 237 | 198 | |||
| Unfunded defined benefit pension schemes | 17 | 19 | 25 | |||
| Unfunded post-retirement healthcare schemes | 90 | 91 | 100 | |||
| Defined benefit schemes | 278 | 347 | 323 | |||
| Defined contribution pension schemes | 33 | 29 | 25 | |||
| Other post-employment costs | 2 | 1 | 2 | |||
| 313 | 377 | 350 | ||||
The costs of the defined benefit pension and post-retirement healthcare schemes are charged in the income statement as follows:
| Cost of sales | 72 | 74 | 71 | |||
| Selling, general and administration | 129 | 175 | 177 | |||
| Research and development | 77 | 98 | 75 | |||
| 278 | 347 | 323 | ||||
GSK entities operate pension arrangements which cover the Group’s material obligations to provide pensions to retired employees. These arrangements have been developed in accordance with local practices in the countries concerned. Pension benefits can be provided by state schemes; by defined contribution schemes, whereby retirement benefits are determined by the value of funds arising from contributions paid in respect of each employee, or by defined benefit schemes, whereby retirement benefits are based on employee pensionable remuneration and length of service. Some ‘hybrid’ defined benefit schemes also include defined contribution sections.
Contributions to defined benefit schemes are determined in accordance with the advice of independent, professionally qualified actuaries. Pension costs of defined benefit schemes for accounting purposes have been assessed in accordance with independent actuarial advice, using the projected unit method. In certain countries pension benefits are provided on an unfunded basis, some administered by trustee companies. Liabilities are generally assessed annually in accordance with the advice of independent actuaries. Formal, independent, actuarial valuations of the Group’s main plans are undertaken regularly, normally at least every three years.
Actuarial movements in the year are recognised in full through the statement of recognised income and expense.
The UK discount rate is based on the iBoxx over 15 year AA index and the US discount rate is based on corporate bond yields which reflect the term of the expected benefit payments. The expected rate of return on bonds reflects the portfolio mix of index-linked, government and corporate bonds. An equity risk premium of between 3% and 4% is added to longer term government bond yields to give the expected rate of return on equities. Projected inflation rate and pension increases are long-term predictions based on the yield gap between long-term index-linked and fixed interest Gilts. In the UK, mortality rates are determined by adjusting the PA92 standard mortality tables to reflect recent scheme experience. These rates are then projected to reflect improvements in life expectancy in line with the medium cohort (i.e. improvements at recently observed higher levels which are assumed to continue to 2020) with minimum improvements thereafter of 1% per year for males and 0.5% for females. In the USA, mortality rates are calculated using the RP2000 fully generational table, projected using scale AA, with the white collar adjustment.
The mortality assumptions for the UK and US schemes were set following a review in December 2007. GSK expects to review these again in December 2008.
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
28 Pensions and other post-employment benefitscontinued
The average life expectancy assumed now for an individual at the age of 60 and projected to apply in 2027 for an individual then at the age of 60 is as follows:
| UK | USA | |||||||
| Male | Female | Male | Female | |||||
| Years | Years | Years | Years | |||||
| Current | 26.8 | 28.0 | 24.4 | 26.1 | ||||
| Projected for 2027 | 29.2 | 29.8 | 25.9 | 27.0 | ||||
The assets of funded schemes are generally held in separately administered trusts or are insured. Assets are invested in different classes in order to maintain a balance between risk and return. Investments are diversified to limit the financial effect of the failure of any individual investment. Following an asset liability study in 2007, the Group decided to adopt a strategy to reduce gradually the allocation of investment in equities. In the UK it is proposed that the strategy will be linked to the funding levels in the schemes and this will be considered further with the trustees of the UK schemes in 2008. The allocation of equities and property in the US scheme will be reduced from 80% of the total to 60% in 2008.
In the UK the defined benefit pension schemes operated for the benefit of former Glaxo Wellcome employees and former SmithKline Beecham employees remain separate. These schemes were closed to new entrants in 2001 and subsequent UK employees are entitled to join a defined contribution scheme. In the USA the former Glaxo Wellcome and SmithKline Beecham defined benefit schemes were merged during 2001. In addition, the Group operates a number of post-retirement healthcare schemes, the principal one of which is in the USA.
The Group has applied the following financial assumptions in assessing the defined benefit liabilities:
| UK | USA | Rest of World | ||||||||||||||||
| 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | ||||||||||
| % pa | % pa | % pa | % pa | % pa | % pa | % pa | % pa | % pa | ||||||||||
| Rate of increase of future earnings | 4.25 | 4.25 | 4.00 | 5.00 | 5.00 | 5.00 | 3.25 | 3.25 | 3.25 | |||||||||
| Discount rate | 5.75 | 5.00 | 4.75 | 6.00 | 5.75 | 5.50 | 4.75 | 4.25 | 3.75 | |||||||||
| Expected pension increases | 3.25 | 3.00 | 2.75 | n/a | n/a | n/a | 2.00 | 2.00 | 2.00 | |||||||||
| Cash balance credit/conversion rate | n/a | n/a | n/a | 4.75 | 4.75 | 4.50 | 1.60 | 1.75 | 1.75 | |||||||||
| Inflation rate | 3.25 | 3.00 | 2.75 | 2.50 | 2.50 | 2.50 | 1.75 | 1.75 | 1.75 | |||||||||
The amounts recorded in the income statement and statement of recognised income and expense for the three years ended 31st December 2007 in relation to the defined benefit pension and post-retirement healthcare schemes were as follows:
| Pensions | Post-retirement benefits | |||||||||
| UK | USA | Rest of World | Group | Group | ||||||
| 2007 | £m | £m | £m | £m | £m | |||||
| Amounts charged to operating profit | ||||||||||
| Current service cost | 138 | 60 | 57 | 255 | 30 | |||||
| Past service cost | – | (7 | ) | 1 | (6 | ) | – | |||
| Expected return on pension scheme assets | (389 | ) | (141 | ) | (37 | ) | (567 | ) | – | |
| Interest on scheme liabilities | 335 | 107 | 41 | 483 | 54 | |||||
| Settlements and curtailments | 24 | 5 | (6 | ) | 23 | 6 | ||||
| 108 | 24 | 56 | 188 | 90 | ||||||
Actuarial gains recorded in the statement ofrecognised income and expense | 523 | 66 | 43 | 632 | 39 | |||||
| Pensions | Post-retirement benefits | |||||||||
| UK | USA | Rest of World | Group | Group | ||||||
| 2006 | £m | £m | £m | £m | £m | |||||
| Amounts charged to operating profit | ||||||||||
| Current service cost | 135 | 66 | 56 | 257 | 48 | |||||
| Past service cost | 33 | – | (2 | ) | 31 | – | ||||
| Expected return on pension scheme assets | (333 | ) | (142 | ) | (30 | ) | (505 | ) | – | |
| Interest on scheme liabilities | 307 | 113 | 42 | 462 | 57 | |||||
| Settlements and curtailments | 17 | (2 | ) | (4 | ) | 11 | (14 | ) | ||
| 159 | 35 | 62 | 256 | 91 | ||||||
Actuarial gains recorded in the statement ofrecognised income and expense | 111 | 169 | 10 | 290 | 139 | |||||
| 118 | GSK Annual Report 2007 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
28 Pensions and other post-employment benefitscontinued
| Pensions | Post-retirement benefits | |||||||||
| 2005 | UK | USA | Rest of World | Group | Group | |||||
| £m | £m | £m | £m | £m | ||||||
| Amounts charged to operating profit | ||||||||||
| Current service cost | 117 | 63 | 52 | 232 | 46 | |||||
| Past service cost | – | – | – | – | 1 | |||||
| Expected return on pension scheme assets | (285 | ) | (126 | ) | (28 | ) | (439 | ) | – | |
| Interest on scheme liabilities | 276 | 104 | 34 | 414 | 53 | |||||
| Settlements and curtailments | 16 | – | – | 16 | – | |||||
| 124 | 41 | 58 | 223 | 100 | ||||||
Actuarial losses recorded in the statement ofrecognised income and expense | (490 | ) | (109 | ) | (93 | ) | (692 | ) | (102 | ) |
The total actuarial losses recorded in the statement of recognised income and expense since 1st January 2003 amount to £18 million.
The fair values of the assets and liabilities of the UK and US defined benefit pension schemes, together with aggregated data for other defined benefit pension schemes in the Group are as follows:
| UK | USA | Rest of World | Group | |||||||||||
| Average | ||||||||||||||
| At 31st December 2007 | Expected rate | Fair | Expected rate | Fair | expected rate | Fair | Fair | |||||||
| of return | value | of return | value | of return | value | value | ||||||||
| % | £m | % | £m | % | £m | £m | ||||||||
| Equities | 8.00 | 4,578 | 8.50 | 1,446 | 7.50 | 223 | 6,247 | |||||||
| Property | 7.00 | 338 | 7.50 | 213 | 7.00 | 20 | 571 | |||||||
| Bonds | 5.00 | 2,322 | 5.00 | 335 | 4.00 | 430 | 3,087 | |||||||
| Other assets | 6.00 | 55 | 4.75 | 10 | 4.25 | 212 | 277 | |||||||
| Fair value of assets | 7,293 | 2,004 | 885 | 10,182 | ||||||||||
| Present value of scheme obligations | (7,371 | ) | (1,945 | ) | (1,022 | ) | (10,338 | ) | ||||||
| (78 | ) | 59 | (137 | ) | (156 | ) | ||||||||
| Included in other non-current assets | 10 | 215 | 30 | 255 | ||||||||||
| Included in pensions and other post-employment benefits | (88 | ) | (156 | ) | (167 | ) | (411 | ) | ||||||
| (78 | ) | 59 | (137 | ) | (156 | ) | ||||||||
| | ||||||||||||||
| Actual return on plan assets | 557 | 187 | 19 | 763 | ||||||||||
| UK | USA | Rest of World | Group | |||||||||||
| Average | ||||||||||||||
| At 31st December 2006 | Expected rate | Fair | Expected rate | Fair | expected rate | Fair | Fair | |||||||
| of return | value | of return | value | of return | value | value | ||||||||
| % | £m | % | £m | % | £m | £m | ||||||||
| Equities | 8.00 | 4,218 | 8.50 | 1,412 | 7.25 | 205 | 5,835 | |||||||
| Property | 7.00 | 210 | 7.50 | 169 | 6.75 | 11 | 390 | |||||||
| Bonds | 4.50 | 2,026 | 5.50 | 324 | 3.50 | 351 | 2,701 | |||||||
| Other assets | 5.00 | 100 | 5.00 | 48 | 3.75 | 174 | 322 | |||||||
| Fair value of assets | 6,554 | 1,953 | 741 | 9,248 | ||||||||||
| Present value of scheme obligations | (7,444 | ) | (1,949 | ) | (952 | ) | (10,345 | ) | ||||||
| (890 | ) | 4 | (211 | ) | (1,097 | ) | ||||||||
| Included in other non-current assets | – | 160 | 19 | 179 | ||||||||||
| Included in pensions and other post-employment benefits | (890 | ) | (156 | ) | (230 | ) | (1,276 | ) | ||||||
| (890 | ) | 4 | (211 | ) | (1,097 | ) | ||||||||
| Actual return on plan assets | 560 | 310 | 56 | 926 | ||||||||||
| GSK Annual Report 2007 | 119 |
| FINANCIAL STATEMENTS | |
| Notes to the financialstatements | |
| Notes to the financial statements | |
| continued | |
28 Pensions and other post-employment benefitscontinued
| UK | USA | Rest of World | Group | |||||||||||
| At 31st December 2005 | Average | |||||||||||||
| Expected rate | Fair | Expected rate | Fair | expected rate | Fair | Fair | ||||||||
| of return | value | of return | value | of return | value | value | ||||||||
| % | £m | % | £m | % | £m | £m | ||||||||
| Equities | 7.75 | 3,895 | 8.50 | 1,440 | 7.00 | 192 | 5,527 | |||||||
| Property | – | – | 7.50 | 106 | 6.25 | 11 | 117 | |||||||
| Bonds | 4.25 | 1,764 | 5.50 | 352 | 3.50 | 302 | 2,418 | |||||||
| Other assets | 4.00 | 85 | 4.00 | 78 | 3.25 | 152 | 315 | |||||||
| Fair value of assets | 5,744 | 1,976 | 657 | 8,377 | ||||||||||
| Present value of scheme obligations | (7,054 | ) | (2,150 | ) | (922 | ) | (10,126 | ) | ||||||
| (1,310 | ) | (174 | ) | (265 | ) | (1,749 | ) | |||||||
| Included in other non-current assets | – | – | 12 | 12 | ||||||||||
| Included in pensions and other post-employment benefits | (1,310 | ) | (174 | ) | (277 | ) | (1,761 | ) | ||||||
| (1,310 | ) | (174 | ) | (265 | ) | (1,749 | ) | |||||||
| Actual return on plan assets | 932 | 129 | 63 | 1,124 | ||||||||||
| Post-retirement | ||||||||||
| Pensions | benefits | |||||||||
| Movements in defined benefit obligations | UK | USA | Rest of World | Group | Group | |||||
| £m | £m | £m | £m | £m | ||||||
| Obligations at 1st January 2005 | (5,735 | ) | (1,750 | ) | (761 | ) | (8,246 | ) | (1,005 | ) |
| Exchange adjustments | – | (217 | ) | 14 | (203 | ) | (138 | ) | ||
| Service cost | (117 | ) | (63 | ) | (52 | ) | (232 | ) | (47 | ) |
| Interest cost | (276 | ) | (104 | ) | (34 | ) | (414 | ) | (53 | ) |
| Settlements and curtailments | (16 | ) | – | – | (16 | ) | – | |||
| Actuarial losses | (1,137 | ) | (112 | ) | (128 | ) | (1,377 | ) | (102 | ) |
| Scheme participants’ contributions | (12 | ) | – | (3 | ) | (15 | ) | (9 | ) | |
| Benefits paid | 239 | 96 | 42 | 377 | 46 | |||||
| Obligations at 31st December 2005 | (7,054 | ) | (2,150 | ) | (922 | ) | (10,126 | ) | (1,308 | ) |
| Exchange adjustments | – | 267 | 30 | 297 | 151 | |||||
| Service cost | (168 | ) | (66 | ) | (54 | ) | (288 | ) | (48 | ) |
| Interest cost | (307 | ) | (113 | ) | (42 | ) | (462 | ) | (57 | ) |
| Settlements and curtailments | (17 | ) | 2 | 12 | (3 | ) | 14 | |||
| Actuarial (losses)/gains | (116 | ) | 1 | (16 | ) | (131 | ) | 139 | ||
| Scheme participants’ contributions | (11 | ) | – | (3 | ) | (14 | ) | (8 | ) | |
| Benefits paid | 229 | 110 | 43 | 382 | 54 | |||||
| Obligations at 31st December 2006 | (7,444 | ) | (1,949 | ) | (952 | ) | (10,345 | ) | (1,063 | ) |
| Exchange adjustments | – | 34 | (80 | ) | (46 | ) | 9 | |||
| Service cost | (138 | ) | (53 | ) | (58 | ) | (249 | ) | (30 | ) |
| Interest cost | (335 | ) | (107 | ) | (41 | ) | (483 | ) | (54 | ) |
| Settlements and curtailments | (24 | ) | (5 | ) | 4 | (25 | ) | (6 | ) | |
| Actuarial gains | 355 | 20 | 61 | 436 | 39 | |||||
| Scheme participants’ contributions | (38 | ) | – | (5 | ) | (43 | ) | – | ||
| Benefits paid | 253 | 115 | 49 | 417 | 44 | |||||
| Transfers | – | – | – | – | 89 | |||||
| Recognised in the balance sheet at 31st December 2007 | (7,371 | ) | (1,945 | ) | (1,022 | ) | (10,338 | ) | (972 | ) |
| Unrecognised past service costs | – | – | – | – | (47 | ) | ||||
| Obligations at 31st December 2007 | (7,371 | ) | (1,945 | ) | (1,022 | ) | (10,338 | ) | (1,019 | ) |
The UK defined benefit schemes include defined contribution sections with obligations totalling £693 million at 31st December 2007 (2006 – £609 million, 2005 – £515 million).
| 120 | GSK Annual Report 2007 |
| FINANCIAL STATEMENTS | |
| Notes to the financialstatements | |
| Notes to the financial statements | |
| continued | |
28 Pensions and other post-employment benefitscontinued
The liability for the US post-retirement healthcare scheme has been assessed using the same assumptions as for the US pension scheme, together with the assumption for future medical inflation of 8.5% (2006 – 9.25%), reducing by 0.75% per year to 5% in 2013 and thereafter. During 2007, the US post-retirement healthcare scheme was amended. The main change was an increase in the cap on company costs. At the year-end the plan obligation was £879 million. However, in accordance with IAS 19 the unvested part of a benefit improvement is not recognised immediately on the balance sheet but is recognised gradually through the income statement. At the year-end the unrecognised amount was £47 million and the amount recognised on the balance sheet was therefore £832 million (2006 – £927 million, 2005 – £1,133 million).
The Group provides certain medical benefits to disabled employees and their spouses in the USA. The obligations for these benefits which were transferred at a value of £89 million are now shown within other provisions.
The defined benefit pension obligation is analysed as follows:
| 2007 | 2006 | 2005 | ||||
| £m | £m | £m | ||||
| Funded | (10,079 | ) | (10,099 | ) | (9,858 | ) |
| Unfunded | (259 | ) | (246 | ) | (268 | ) |
| (10,338 | ) | (10,345 | ) | (10,126 | ) | |
Post-retirement benefits are unfunded.
| Post-retirement | ||||||||||
| Pensions | benefits | |||||||||
| Movements in fair values of assets | UK | USA | Rest of World | Group | Group | |||||
| £m | £m | £m | £m | £m | ||||||
| Assets at 1st January 2005 | 4,561 | 1,638 | 547 | 6,746 | – | |||||
| Exchange adjustments | – | 200 | (4 | ) | 196 | – | ||||
| Expected return on assets | 285 | 126 | 28 | 439 | – | |||||
| Actuarial gains | 647 | 3 | 35 | 685 | – | |||||
| Employer contributions | 478 | 105 | 90 | 673 | 37 | |||||
| Scheme participants’ contributions | 12 | – | 3 | 15 | 9 | |||||
| Benefits paid | (239 | ) | (96 | ) | (42 | ) | (377 | ) | (46 | ) |
| Assets at 31st December 2005 | 5,744 | 1,976 | 657 | 8,377 | – | |||||
| Exchange adjustments | – | (255 | ) | (30 | ) | (285 | ) | – | ||
| Expected return on assets | 333 | 142 | 30 | 505 | – | |||||
| Settlements and curtailments | – | – | (8 | ) | (8 | ) | – | |||
| Actuarial gains | 227 | 168 | 26 | 421 | – | |||||
| Employer contributions | 468 | 32 | 106 | 606 | 46 | |||||
| Scheme participants’ contributions | 11 | – | 3 | 14 | 8 | |||||
| Benefits paid | (229 | ) | (110 | ) | (43 | ) | (382 | ) | (54 | ) |
| Assets at 31st December 2006 | 6,554 | 1,953 | 741 | 9,248 | – | |||||
| Exchange adjustments | – | (29 | ) | 68 | 39 | – | ||||
| Expected return on assets | 389 | 141 | 37 | 567 | – | |||||
| Settlements and curtailments | – | – | 2 | 2 | – | |||||
| Actuarial gains | 168 | 46 | (18 | ) | 196 | – | ||||
| Employer contributions | 397 | 8 | 99 | 504 | 41 | |||||
| Scheme participants’ contributions | 38 | – | 5 | 43 | 3 | |||||
| Benefits paid | (253 | ) | (115 | ) | (49 | ) | (417 | ) | (44 | ) |
| Assets at 31st December 2007 | 7,293 | 2,004 | 885 | 10,182 | – | |||||
The UK defined benefit schemes include defined contribution sections with account balances totalling £693 million at 31st December 2007 (2006 – £609 million, 2005 – £515 million).
During 2007, the Group made special funding contributions to the UK pension schemes totalling £285 million (2006 – £346 million to the UK and US pension schemes). In 2006, GSK formalised an agreement with the trustees of the UK defined benefit pension schemes to make additional contributions of up to £325 million per year in addition to the normal contributions, over a four-year period ending 31st December 2009 in order to eliminate the then pension deficits on an IAS 19 basis.
Employer contributions for 2008, including special funding contributions, are estimated to be approximately £200 million in respect of defined benefit pension schemes and £40 million in respect of post-retirement benefits.
| GSK Annual Report 2007 | 121 |
| FINANCIAL STATEMENTS | |
| Notes to the financialstatements | |
| Notes to the financial statements | |
| continued | |
28 Pensions and other post-employment benefitscontinued
| Post-retirement | ||||||||||
| Pensions | benefits | |||||||||
| History of experience gains and losses | UK | USA | Rest of World | Group | Group | |||||
| £m | £m | £m | £m | £m | ||||||
| 2007 | ||||||||||
| Experience gains/(losses) of scheme assets (£m) | 168 | 46 | (18 | ) | 196 | |||||
| Percentage of scheme assets at 31st December 2007 | 2 | % | 2 | % | 2 | % | 2 | % | ||
| Experience gains/(losses) of scheme liabilities (£m) | 33 | (30 | ) | 6 | 9 | – | ||||
| Percentage of scheme obligations at 31st December 2007 | – | 2 | % | 1 | % | – | – | |||
| Fair value of assets | 7,293 | 2,004 | 885 | 10,182 | – | |||||
| Present value of scheme obligations | (7,371 | ) | (1,945 | ) | (1,022 | ) | (10,338 | ) | (1,019 | ) |
| (Deficits)/surpluses in the schemes | (78 | ) | 59 | (137 | ) | (156 | ) | (1,019 | ) | |
| 2006 | ||||||||||
| Experience gains of scheme assets (£m) | 227 | 168 | 26 | 421 | ||||||
| Percentage of scheme assets at 31st December 2006 | 3 | % | 9 | % | 4 | % | 5 | % | ||
| Experience (losses)/gains of scheme liabilities (£m) | (37 | ) | (16 | ) | (42 | ) | (95 | ) | 17 | |
| Percentage of scheme obligations at 31st December 2006 | – | 1 | % | 4 | % | 1 | % | 2 | % | |
| Fair value of assets | 6,554 | 1,953 | 741 | 9,248 | – | |||||
| Present value of scheme obligations | (7,444 | ) | (1,949 | ) | (952 | ) | (10,345 | ) | (1,063 | ) |
| (Deficits)/surpluses in the schemes | (890 | ) | 4 | (211 | ) | (1,097 | ) | (1,063 | ) | |
| 2005 | ||||||||||
| Experience gains of scheme assets (£m) | 647 | 3 | 35 | 685 | ||||||
| Percentage of scheme assets at 31st December 2005 | 11 | % | – | 5 | % | 8 | % | |||
| Experience losses of scheme liabilities (£m) | (94 | ) | (10 | ) | (35 | ) | (139 | ) | (4 | ) |
| Percentage of scheme obligations at 31st December 2005 | 1 | % | – | 4 | % | 1 | % | – | ||
| Fair value of assets | 5,744 | 1,976 | 657 | 8,377 | – | |||||
| Present value of scheme obligations | (7,054 | ) | (2,150 | ) | (922 | ) | (10,126 | ) | (1,308 | ) |
| Deficits in the schemes | (1,310 | ) | (174 | ) | (265 | ) | (1,749 | ) | (1,308 | ) |
| 2004 | ||||||||||
| Experience gains of scheme assets (£m) | 196 | 86 | 23 | 305 | ||||||
| Percentage of scheme assets at 31st December 2004 | 4 | % | 5 | % | 4 | % | 5 | % | ||
| Experience (losses)/gains of scheme liabilities (£m) | (25 | ) | (5 | ) | (18 | ) | (48 | ) | 47 | |
| Percentage of scheme obligations at 31st December 2004 | – | – | 2 | % | 1 | % | 5 | % | ||
| Fair value of assets | 4,561 | 1,638 | 547 | 6,746 | – | |||||
| Present value of scheme obligations | (5,735 | ) | (1,750 | ) | (761 | ) | (8,246 | ) | (1,005 | ) |
| Deficits in the schemes | (1,174 | ) | (112 | ) | (214 | ) | (1,500 | ) | (1,005 | ) |
| 2003 | ||||||||||
| Experience gains of scheme assets (£m) | 336 | 231 | 33 | 600 | ||||||
| Percentage of scheme assets at 31st December 2003 | 8 | % | 15 | % | 7 | % | 10 | % | ||
| Experience (losses)/gains of scheme liabilities (£m) | (183 | ) | 5 | (19 | ) | (197 | ) | (123 | ) | |
| Percentage of scheme obligations at 31st December 2003 | 3 | % | – | 3 | % | 2 | % | 13 | % | |
| Fair value of assets | 3,955 | 1,583 | 444 | 5,982 | – | |||||
| Present value of scheme obligations | (5,508 | ) | (1,751 | ) | (707 | ) | (7,966 | ) | (951 | ) |
| Deficits in the schemes | (1,553 | ) | (168 | ) | (263 | ) | (1,984 | ) | (951 | ) |
| 122 | GSK Annual Report 2007 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
| 28 Pensions and other post-employment benefitscontinued | ||
| Sensitivity analysis | ||
| Effect of changes in assumptions used on the annual defined benefit pension and post-retirement costs or the benefit obligations: | ||
| £m | ||
| Increase in annual post-retirement benefits cost | – | |
| Increase in pension obligation | 374 | |
| Increase in post-retirement benefits obligation | 29 | |
| A one year increase in life expectancy would have the following approximate effect: | ||
| Increase in annual pension cost | 17 | |
| Increase in annual post-retirement benefits cost | 3 | |
| Increase in pension obligation | 231 | |
| Increase in post-retirement benefits obligation | 38 | |
| A 0.25% decrease in expected rates of returns on assets would have the following approximate effect: | ||
| Increase in annual pension cost | 24 | |
| A 1% increase in the rate of future healthcare inflation would have the following approximate effect: | ||
| Increase in annual post-retirement benefits cost | 3 | |
| Increase in post-retirement benefits obligation | 47 | |
| A 0.25% increase in inflation would have the following approximate effect: | ||
| Increase in annual pension cost | 26 | |
| Increase in pension obligation | 317 | |
Equity investments include listed investments of £127 million (2003 – £111 million). The market value of listed investments was £172 million (2003 – £184 million).
| 20 Stocks | 2004 | 2003 | ||
| £m | £m | |||
| Raw materials and consumables | 629 | 636 | ||
| Work in progress | 644 | 474 | ||
| Finished goods | 919 | 999 | ||
| 2,192 | 2,109 | |||
| 21 Debtors | 2004 | 2003 | ||
| £m | £m | |||
| Amounts due within one year | ||||
| Trade debtors | 3,786 | 3,715 | ||
| Other debtors | 374 | 532 | ||
| Prepaid pension contributions | 733 | 440 | ||
| Other prepayments and accrued income | 282 | 247 | ||
| Amounts due after one year | ||||
| Other debtors | 596 | 512 | ||
| Prepayments and accrued income | 1 | 10 | ||
| Deferred taxation (Note 12) | 1,537 | 1,441 | ||
| 7,309 | 6,897 | |||
Debtors include trading balances of £7 million (2003 – £1 million) due from joint ventures and associated undertakings. Other debtors due after one year include insurance recovery receivables which have been discounted using a risk-free rate of return.
| 22 Other creditors | 2003 | |||
| 2004 | (restated) | |||
| £m | £m | |||
| Amounts due within one year | ||||
| Trade creditors | 707 | 686 | ||
| Taxation (Note 12) | 1,598 | 1,458 | ||
| Social security | 114 | 108 | ||
| Other creditors | 351 | 313 | ||
| Accruals and deferred income | 3,110 | 3,121 | ||
| Dividends payable | 1,260 | 1,333 | ||
| 7,140 | 7,019 | |||
| Amounts due after one year | ||||
| Other creditors | 178 | 130 | ||
| Accruals and deferred income | 66 | 102 | ||
| 244 | 232 | |||
Accruals include obligations for wages and salaries of £639 million (2003 – £689 million).
| Integration | ||||||||||||
| Legal | New Operational | Employee | and | |||||||||
| and other | Excellence | related | manufacturing | Other | ||||||||
| disputes | programme | provisions | re-organisation | provisions | Total | |||||||
| £m | £m | £m | £m | £m | £m | |||||||
| At 1st January 2007 | 1,105 | – | 175 | 167 | 136 | 1,583 | ||||||
| Exchange adjustments | (1 | ) | 6 | 1 | 2 | 4 | 12 | |||||
| Charge for the year | 349 | 220 | 2 | 32 | 48 | 651 | ||||||
| Reversed unused | (133 | ) | – | (27 | ) | (16 | ) | (41 | ) | (217 | ) | |
| Unwinding of discount | 17 | – | 7 | – | 3 | 27 | ||||||
| Utilised | (186 | ) | (9 | ) | (17 | ) | (64 | ) | (15 | ) | (291 | ) |
| Reclassifications and other movements | 1 | 29 | 93 | (5 | ) | 44 | 162 | |||||
| At 31st December 2007 | 1,152 | 246 | 234 | 116 | 179 | 1,927 | ||||||
| To be settled within one year | 468 | 212 | 55 | 75 | 82 | 892 | ||||||
| To be settled after one year | 684 | 34 | 179 | 41 | 97 | 1,035 | ||||||
| At 31st December 2007 | 1,152 | 246 | 234 | 116 | 179 | 1,927 | ||||||
| GSK Annual Report 2007 | 123 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
29 Other provisionscontinued
| 23 Provisions for | ||||||||||||||
| liabilities and charges | Pensions and other | Legal | ||||||||||||
| post-retirement | Manufacturing | Merger | and other | Deferred | Other | |||||||||
| benefits | restructuring | integration | disputes | taxation | provisions | Total | ||||||||
| £m | £m | £m | £m | £m | £m | £m | ||||||||
| At 1st January 2004 | 807 | 99 | 305 | 1,007 | 618 | 206 | 3,042 | |||||||
| Exchange adjustments | (40 | ) | (2 | ) | (5 | ) | (59 | ) | – | (4 | ) | (110 | ) | |
| Charge for the year | 145 | (25 | ) | – | 660 | 142 | 24 | 946 | ||||||
| Unwinding of discount | – | – | 4 | 11 | – | 1 | 16 | |||||||
| Applied | (208 | ) | (25 | ) | (80 | ) | (545 | ) | – | (122 | ) | (980 | ) | |
| Reclassifications and other movements | 81 | (1 | ) | – | – | (50 | ) | 85 | 115 | |||||
| At 31st December 2004 | 785 | 46 | 224 | 1,074 | 710 | 190 | 3,029 | |||||||
During 2004, the Group made special cash contributions totalling £256 million (2003 – £368 million) into the UKLegal and US pension schemes. The contribution relating to the US pension scheme is included within the amounts applied to the provision above; the contributions relating to the UK pension scheme have increased the pension prepayment amount shown under debtors in Note 21.
The Group has recognised costs in previous years in respect of plans for manufacturing the other restructuring initiated in 1998, 1999 and in 2001 following the merger of Glaxo Wellcome and SmithKline Beecham and the acquisition of Block Drug. These plans are largely completed. Costs recognised as a provision, principally in respect of identified severances at sites where it has been announced that manufacturing activities will cease, are expected to be incurred mainly in 2005 and 2006. Costs of asset write-downs have been recognised as impairments of fixed assets.
The Group has recognised costs in previous years in respect of plans for the integration of the Glaxo Wellcome and SmithKline Beecham businesses. Implementation of the integration following the merger is substantially complete. Costs recognised as a provision in respect of identified severances are expected to be incurred in 2005 and in respect of the programme to encourage staff to convert Glaxo Wellcome or SmithKline Beecham share options into GlaxoSmithKline share options when employees exercise these options up to 2010. This latter provision was discounted by £21 million in 2004 (2003 – £28 million) using risk-free rates of return.
GlaxoSmithKlinedisputes
GSK is involved in a number of legal and other disputes, including notification of possible claims.claims, as set out in Note 44 ‘Legal proceedings’. Provisions for legal and other disputes include amounts relating to US anti-trust, product liability, contract terminations, self-insurance, environmental clean-up and property rental. The company’s Directors, having taken legal and other specialist advice, have established provisions after taking into account insurance and other agreements and having regard to the relevant facts and circumstances of each matter and in accordance with accounting requirements. These
The discount on these provisions were discounteddecreased by £11£10 million in 2004 (2003 – £25 million)2007 (2006 - £2 million increase) and was calculated using risk-adjusted projected cash flows and risk-free rates of return. GlaxoSmithKline has undertakenThe movement in 2007 includes a reviewdecrease of its product liability claims and assessed that£34 million arising from a change in the discount rate in the year. A number of products now have a history of claims made and settlements which makes it possible to use an IBNR (incurred but not reported) actuarial technique to determine a reasonable estimate of the Group’s exposure for unasserted claims in relation to those products. Apart from the IBNR provision, no provisions have been made for unasserted claims. The ultimate liability for such matters may vary from the amounts provided and is dependent upon the outcome of litigation proceedings, investigations and possible settlement negotiations.
It is in the nature of the Group’s business that a number of these matters, including those provided using the IBNR actuarial technique, may be the subject of negotiation and litigation over several years. The largest individual amounts provided are expected to be settled within three years.
At 31st December 2007, it is expected that £89 million (2006 – £120 million) of the provision made for legal and other disputes will be reimbursed by third party insurers. This amount is included within current and non-current assets. For a discussion of legal issues, refer to Note 30,44 ‘Legal proceedings’.
New Operational Excellence programme
In October 2007, GSK announced a significant new £1.5 billion Operational Excellence programme to improve the effectiveness and productivity of its operations. This new programme is expected to deliver annual pre-tax savings of £700 million by 2010. GSK expects to realise the majority of annual savings within the first two years of the programme, with approximately £350 million expected by 2008 and £550 million by 2009. These savings will partly mitigate the expected impact to 2008 earnings from generic competition and lowerAvandia sales and the associated adverse impact on GSK’s gross margin. Costs recognised as a provision, principally in respect of identified severances at sites where it has been announced that manufacturing activities will be reduced or cease, are expected to be incurred mainly in 2008 and 2009. Asset retirement obligations recognised as a provision amount to £29 million in the year. Costs of asset write-downs have been recognised as impairments of property, plant and equipment.
Employee related provisions
Employee related provisions includes the exchange offer incentive programme which operated at the time of the merger to encourage staff to convert Glaxo Wellcome or SmithKline Beecham share options into GlaxoSmithKline share options. The incentive is paid either when employees exercise the relevant options, or when the options lapse, up to 2010. The discount on this provision increased by £7 million in 2007 (2006 – £2 million), and was calculated using risk-free rates of return. The Group provides certain medical benefits to disabled employees and their spouses in the USA. These were transferred from post-retirement benefits at a value of £89 million during the year and are reflected in the total reclassifications and other movements figure of £162 million. At 31st December 2007, the provision for these benefits amounted to £73 million. Other employee benefits reflect a variety of provisions for severance costs, jubilee awards and other long-service benefits.
Integration and manufacturing re-organisation
The Group has recognised costs in previous years in respect of plans for the integration of the Glaxo Wellcome and SmithKline Beecham businesses. Implementation of the integration following the merger is substantially complete. Costs recognised in the remaining merger integration provision in respect of identified severances are expected to be incurred in 2008. Other smaller cost-saving initiatives since the merger are now included within this category.
30 24Other non-current liabilities
| 2007 | 2006 | |||
| £m | £m | |||
| Accruals and deferred income | 68 | 97 | ||
| Other payables | 300 | 249 | ||
| 368 | 346 | |||
At 31st December 20042007 contingent liabilities, comprising guarantees, letters of credit, discounted bills and other items arising in the normal course of business, amounted to £207£206 million (2003(2006 – £236£258 million). At 31st December 2007, £119 million (2006 – £114 million) of financial assets were pledged as collateral for contingent liabilities. For a discussiondiscussions of tax issues, refer to Note 12, ‘Taxation’ and of legal issues, refer to Note 30,14, ‘Taxation’ and Note 44, ‘Legal proceedings’.
| 124 | GSK Annual Report 2007 |
| Notes to the financial statements | ||
| Notes to the financial statements | ||
| continued | ||
| 2004 | 2003 | |||
| £m | £m | |||
| Liquid investments | 2,818 | 2,493 | ||
| Cash at bank | 1,161 | 962 | ||
| 3,979 | 3,455 | |||
| Loans and overdrafts due within one year: | ||||
| 7.375 per cent US$ US Medium Term Note 2005 | (52 | ) | – | |
| 8.75 per cent sterling Euro Bond 2005 | (500 | ) | – | |
| Floating rate US$ European Medium Term Notes | – | (277 | ) | |
| 2.0 per cent CHF Bond 2004 | – | (106 | ) | |
| Commercial paper | (830 | ) | (836 | ) |
| Bank loans and overdrafts | (163 | ) | (230 | ) |
| Other loans | (2 | ) | (2 | ) |
| Obligations under finance leases | (35 | ) | (1 | ) |
| (1,582 | ) | (1,452 | ) | |
| Loans due after one year: | ||||
| 7.375 per cent US$ Medium Term Note 2005 | – | (56 | ) | |
| 8.75 per cent sterling Euro Bond 2005 | – | (499 | ) | |
| 6.125 per cent US$ Notes 2006 | (260 | ) | (279 | ) |
| 2.375 per cent US$ US Medium Term Note 2007 | (260 | ) | – | |
| 3.375 per cent euro European Medium Term Note 2008 | (705 | ) | (699 | ) |
| 4.875 per cent sterling European Medium Term Note 2008 | (498 | ) | (498 | ) |
| 3.25 per cent euro European Medium Term Note 2009 | (348 | ) | (357 | ) |
| 4.375 per cent US$ US Medium Term Note 2014 | (772 | ) | – | |
| 5.25 per cent sterling European Medium Term Note 2033 | (975 | ) | (974 | ) |
| 5.375 per cent US$ US Medium Term Note 2034 | (258 | ) | – | |
| Loan Stock | (12 | ) | (13 | ) |
| Bank loans | (4 | ) | (4 | ) |
| Other loans and private financing | (231 | ) | (260 | ) |
| Obligations under finance leases | (58 | ) | (12 | ) |
| (4,381 | ) | (3,651 | ) | |
| Net debt | (1,984 | ) | (1,648 | ) |
| 2007 | 2006 | |||
| £m | £m | |||
| Current assets: | ||||
| Liquid investments | 1,153 | 1,035 | ||
| Cash and cash equivalents | 3,379 | 2,005 | ||
| 4,532 | 3,040 | |||
| Short-term borrowings: | ||||
| 2.375% US$ Medium Term Note 2007 | – | (255 | ) | |
| 3.375% € European Medium Term Note | (736 | ) | – | |
| 4.875% £ European Medium Term Note | (497 | ) | – | |
| Commercial paper | (2,064 | ) | – | |
| Bank loans and overdrafts | (161 | ) | (410 | ) |
| Other loans | (6 | ) | (11 | ) |
| Obligations under finance leases | (40 | ) | (42 | ) |
| (3,504 | ) | (718 | ) | |
| Long-term borrowings: | ||||
| 3.375% € European Medium Term Note 2008 | – | (671 | ) | |
| 4.875% £ European Medium Term Note 2008 | – | (494 | ) | |
| 3.25% € European Medium Term Note 2009 | (368 | ) | (338 | ) |
| 3.00% € European Medium Term Note 2012 | (548 | ) | (503 | ) |
| 5.125% € European Medium Term Note 2012 | (1,645 | ) | – | |
| 4.375% US$ US Medium Term Note 2014 | (746 | ) | (719 | ) |
| 5.625% € European Medium Term Note 2017 | (912 | ) | – | |
| 4.00% € European Medium Term Note 2025 | (542 | ) | (497 | ) |
| 5.25% £ European Medium Term Note 2033 | (978 | ) | (977 | ) |
| 5.375% US$ US Medium Term Note 2034 | (249 | ) | (253 | ) |
| 5.25% £ European Medium Term Note 2042 | (984 | ) | – | |
| Loan stock | (9 | ) | (10 | ) |
| Bank loans | (1 | ) | (1 | ) |
| Other loans and private financing | (2 | ) | (212 | ) |
| Obligations under finance leases | (83 | ) | (97 | ) |
| (7,067 | ) | (4,772 | ) | |
| Net debt | (6,039 | ) | (2,450 | ) |
At the balance sheet date the Group’s liquid investments had an aggregate market value of £2,820 million (2003 – £2,509 million). Current assets
Liquid investments includeare classified as available-for-sale investments. At 31st December 2007, they included redeemable preference shares, which are fullywere 102% collateralised with highly rated bonds, of £1€1 billion (2003(£736 million) (2006 – £1 billion)€1 billion (£676 million)) and government bonds. The effective interest rate on liquid investments at 31st December 2007 was approximately 4.9% (2006 – approximately 3.7%) . Liquid investment balances at 31st December 2007 earning interest at floating and fixed rates amount to £868 million and £285 million, respectively (2006 – £750 million and £285 million).
The effective interest rate on cash and cash equivalents at 31st December 2007 was approximately 5.0% (2006 – approximately 4.8%) . Cash and cash equivalents balances at 31st December 2007 earning interest at floating and fixed rates amount to £3,257 million and £36 million, respectively (2006 – £1,940 million and £12 million).
From July 2007 onwards, GSK tightened its criteria for holding cash equivalents and liquid investments in response to the credit crisis. GSK has suffered no loss of principal as a result of this crisis.
GSK’s policy regarding the credit quality of cash and cash equivalents is referred to in Note 41, ‘Financial instruments and related disclosures’.
| GSK Annual Report 2007 | 125 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
32 Net debt continued
Loans and overdrafts due within one yearShort-term borrowings
Commercial paper comprises a US$10US $10 billion programme, of which $1,593 million$4.1 billion (£830 million)2.1 billion) was in issue at 31st December 2004 (20032007 (2006 – $1,497 million (£836 million))nil), backed up by committed facilities of 364 days duration of $5 billion (£2.5 billion) (2006 – $900 million (£469 million) (2003 – $1,404 million (£784459 million)) renewable annually, and liquid investments, cash and cash equivalents as shown in the table above.
The weighted average interest rate on commercial paper borrowings at 31st December 2004 was 2.35 per cent (2003 – 1.1 per cent).
The weighted average interest rate oncurrent bank loans and overdrafts due within one year at 31st December 20042007 was 3.0 per cent.4.85% (2006 – 2.4%).
LoansLong-term borrowings
At the year-end, GSK had long-term borrowings of £7.1 billion (2006 – £4.8 billion) of which £4.4 billion (2006 – £3.2 billion) falls due after one yearIn 2004, three bonds were issued under the US Medium Term Note programme; a US$500 million, 2.375 per cent coupon bond, a US$1.5 billion, 4.375 per cent coupon bond, a US$500 million, 5.375 per cent coupon bond.in more than five years.
Loans due after one year are repayable over various periods as follows:
| 2004 | 2003 | |||
| £m | £m | |||
| Between one and two years | 289 | 562 | ||
| Between two and three years | 279 | 281 | ||
| Between three and four years | 1,210 | 2 | ||
| Between four and five years | 352 | 1,199 | ||
| After five years | 2,251 | 1,607 | ||
| 4,381 | 3,651 | |||
The loansLong-term borrowings repayable after five years carry interest at effective rates between 4.4 per cent4.03% and 5.4 per cent.5.66% . The repayment dates range from 20102014 to 2034.2042. The average effective interest rate of all notes at 31st December 2007 was approximately 4.8% (2006 – approximately 4.3%).
Secured loans
GSK had no loans secured by charges on non-current and current assets in the year (2006 – £nil).
| 2007 | 2006 | ||||
| Finance lease obligations | £m | £m | |||
| Rental payments due within one year | 45 | 49 | |||
| Rental payments due between one and two years | 40 | 41 | |||
| Rental payments due between two and three years | 26 | 30 | |||
| Rental payments due between three and four years | 11 | 18 | |||
| Rental payments due between four and five years | 5 | 8 | |||
| Rental payments due after five years | 10 | 14 | |||
| Total future rental payments | 137 | 160 | |||
| Future finance charges | (14 | ) | (21 | ) | |
| Total finance lease obligations | 123 | 139 | |||
Finance lease obligations at 31st December 2007 bearing interest at floating and fixed rates amount to £94 million and £29 million, respectively (2006 – £93 million and £46 million).
| 126 | GSK Annual Report 2007 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
25 Net debt continued
Secured loansLoans amounting to £11 million (2003 – £13 million) are secured by charges on fixed and current assets.
| 2004 | 2003 | |||
| Finance lease obligations | £m | £m | ||
| Rental payments due within one year | 36 | 1 | ||
| Rental payments due between one and two years | 28 | 2 | ||
| Rental payments due between two and three years | 17 | 1 | ||
| Rental payments due between three and four years | 5 | 1 | ||
| Rental payments due between four and five years | 3 | 2 | ||
| Rental payments due after five years | 7 | 6 | ||
| Total future rental payments | 96 | 13 | ||
| Future finance charges | (3 | ) | – | |
| Total finance lease obligations | 93 | 13 | ||
Financial instrumentsFurther information is given in Note 34.
26Commitments
| 2004 | 2003 | |||
| Capital commitments | £m | £m | ||
| Contracted for but not provided in the financial statements: | ||||
| Intangible fixed assets | 1,256 | 1,412 | ||
| Tangible fixed assets | 235 | 171 | ||
| 1,491 | 1,583 | |||
A number of commitments were made in 2004 under licensing and other agreements, principally with Theravance Inc., Exelixis Inc., Tanabe Seiyaku Co. Ltd., and Human Genome Sciences, Inc.
The Group also has other commitments of £85 million (2003 – £144 million) relating to revenue payments to be made under licences and other alliances, principally to Exelixis Inc.
| 2004 | 2003 | |||
| Commitments under operating leases to pay rentals for the next year | £m | £m | ||
| Operating leases on land and buildings which expire: | ||||
| In one year or less | 4 | 6 | ||
| Between one and five years | 16 | 19 | ||
| After five years | 30 | 35 | ||
| 50 | 60 | |||
| Operating leases on plant, equipment and vehicles which expire: | ||||
| In one year or less | 10 | 8 | ||
| Between one and five years | 23 | 50 | ||
| After five years | – | 2 | ||
| 33 | 60 | |||
| Commitments under operating leases to pay rentals in future years | ||||
| 2005 | 83 | 94 | ||
| 2006 | 73 | 78 | ||
| 2007 | 54 | 54 | ||
| 2008 | 42 | 43 | ||
| 2009 | 36 | 36 | ||
| 2010 and thereafter | 119 | 122 | ||
| 407 | 427 | |||
| Notes to the financial statements | ||
| continued | ||
| Ordinary Shares of 25p each | Share premium account £m | |||||
| 27 Share capital and share premium account | Number | £m | ||||
| Share capital authorised | ||||||
| At 31st December 2002 | 10,000,000,000 | 2,500 | ||||
| At 31st December 2003 | 10,000,000,000 | 2,500 | ||||
| At 31st December 2004 | 10,000,000,000 | 2,500 | ||||
| Share capital issued and fully paid | ||||||
| At 1st January 2002 | 6,172,965,989 | 1,543 | 170 | |||
| Share capital issued under share option schemes | 7,049,394 | 2 | 54 | |||
| Share capital purchased and cancelled | (155,749,038 | ) | (39 | ) | – | |
| At 31st December 2002 | 6,024,266,345 | 1,506 | 224 | |||
| Share capital issued under share option schemes | 6,041,283 | 1 | 40 | |||
| Share capital purchased and cancelled | (80,844,000 | ) | (20 | ) | – | |
| At 31st December 2003 | 5,949,463,628 | 1,487 | 264 | |||
| Share capital issued under share option schemes | 6,300,203 | 2 | 40 | |||
| Share capital purchased and cancelled | (18,075,000 | ) | (5 | ) | – | |
| At 31st December 2004 | 5,937,688,831 | 1,484 | 304 | |||
| 31st December 2004 | 31st December 2003 | 31st December 2002 | ||||
| Number (‘000) of shares issuable under outstanding options (Note 36) | 276,954 | 259,990 | 217,953 | |||
| Number (‘000) of unissued shares not under option | 3,785,358 | 3,790,546 | 3,757,781 | |||
33 Share capital and share premium account
| Ordinary shares of 25p each | Share | ||||||
| Premium | |||||||
| Number | £m | £m | |||||
| Share capital authorised | �� | ||||||
| At 31st December 2005 | 10,000,000,000 | 2,500 | |||||
| At 31st December 2006 | 10,000,000,000 | 2,500 | |||||
| At 31st December 2007 | 10,000,000,000 | 2,500 | |||||
| Share capital issued and fully paid | |||||||
| At 1st January 2005 | 5,937,688,831 | 1,484 | 304 | ||||
| Issued under share option schemes | 25,162,425 | 7 | 245 | ||||
| At 31st December 2005 | 5,962,851,256 | 1,491 | 549 | ||||
| Issued under share option schemes | 28,750,592 | 7 | 309 | ||||
| At 31st December 2006 | 5,991,601,848 | 1,498 | 858 | ||||
| Issued under share option schemes | 37,307,678 | 9 | 408 | ||||
| Share capital purchased and cancelled | (16,322,500 | ) | (4 | ) | – | ||
| At 31st December 2007 | 6,012,587,026 | 1,503 | 1,266 | ||||
| 31st December | 31st December | 31st December | |||||
| 2007 | 2006 | 2005 | |||||
| Number (‘000) of shares issuable under outstanding options (Note 42) | 218,182 | 225,163 | 221,293 | ||||
| Number (‘000) of unissued shares not under option | 3,769,231 | 3,783,235 | 3,815,856 | ||||
At 31st December 2004,2007, of the issued share capital, 174,527,097134,529,906 shares were held in the ESOP Trust, 69,948,000504,194,158 shares were held inas Treasury shares and 5,693,213,7345,373,862,962 shares were in free issue. All issued shares are fully paid. The nominal, carrying and market values of the shares held in the ESOP Trust are disclosed in Note 42, Employee share schemes’.
In October 2002, GlaxoSmithKline commenced a new £4 billion share buy-back programme. This followedJuly 2007, the completion of the £4 billion buy-back programme announced in 2001. A total of £2.2 billion has been spent on the newGroup increased its share buy-back programme ofto £12 billion, which £1 billion was spent in 2004.is expected to be completed over a two-year period. The exact amount and timing of future purchases, and whether some repurchased shares will be held as Treasury shares or be cancelled, will be determined by the company and is dependent on market conditions and other factors. NoIn 2007, the Group also commenced close period share buy-backs by operating under specific, irrevocable agreements put in place with its brokers prior to the start of each close period.
A total of £11.6 billion has been spent by the company between 1st January 2001 and 31st December 2007 on buying its own shares werefor cancellation or to be held as Treasury shares, of which £3.8 billion was spent in 2007.
28.9 million shares have been purchased and cancelled in the period 1st January 20052008 to 10th22nd February 2005. In the period 11th February 2005 to 25th February 2005 a further 5.55 million shares have been purchased2008 at a cost of £70£323 million. All purchases were made through the publicly announced buy-back programme.
The table below sets out the monthly purchases under the current share buy-back programme:
| Average share price excluding | ||||
| Number of shares | commisson and stamp duty | |||
| Month | (000) | £ | ||
| January 2004 | Nil | – | ||
| February 2004 | 4,950 | 11.09 | ||
| March 2004 | 20,545 | 10.81 | ||
| April 2004 | 1,010 | 11.85 | ||
| May 2004 | 7,832 | 11.73 | ||
| June 2004 | 10,156 | 11.43 | ||
| July 2004 | 1,800 | 11.06 | ||
| August 2004 | 11,850 | 10.88 | ||
| September 2004 | 8,485 | 11.72 | ||
| October 2004 | Nil | – | ||
| November 2004 | 10,305 | 11.60 | ||
| December 2004 | 11,090 | 11.64 | ||
| Total | 88,023 | 11.29 | ||
| Average share price excluding | |||||
| Number of shares | commission and stamp duty | ||||
| Month | 000 | £ | |||
| January 2007 | 12,090 | 13.87 | |||
| February 2007 | 9,910 | 14.48 | |||
| March 2007 | 23,900 | 13.97 | |||
| April 2007 | 8,800 | 14.45 | |||
| May 2007 | 12,886 | 13.78 | |||
| June 2007 | 22,480 | 13.05 | |||
| July 2007 | 3,950 | 12.56 | |||
| August 2007 | 47,528 | 12.76 | |||
| September 2007 | 38,512 | 13.21 | |||
| October 2007 | 55,775 | 12.76 | |||
| November 2007 | 32,880 | 12.10 | |||
| December 2007 | 16,323 | 12.99 | |||
| Total | 285,034 | 13.09 | |||
Of the shares purchased in 2007, 269 million (£3,537 million) are held as Treasury shares and 16 million (£213 million) have been cancelled. For details of substantial shareholdings refer to ‘Substantial shareholdings’ on page 177.170.
28 Non-equity minority interests
At 1st January 2004 SmithKline Beecham Holdings Corporation (SBH Corp), a subsidiary incorporated in Delaware, USA, had in issue $500 million of Flexible Auction Market Preferred Stock (Flex AMPS), comprising 5,000 shares of $100,000 each, issued in six series. SBH Corp also had in issue $400 million of Auction Rate Preference Stock (ARPS), comprising 4,000 shares of $100,000 each issued in five series. The ARPS and the Flex AMPS together constituted the preference shares, which represented the non-equity minority interests. These were redeemed in March and April 2004.
| GSK Annual Report 2007 | 127 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| Shareholders’ equity | |||||||||||||||
| Share | Share | Retained | Other | Total | Minority | Total | |||||||||
| capital | premium | earnings | reserves | £m | interests | equity | |||||||||
| £m | £m | £m | £m | £m | £m | ||||||||||
| At 1st January 2005 | 1,484 | 304 | 4,448 | (528 | ) | 5,708 | 217 | 5,925 | |||||||
| Recognised income and expense for the year | – | – | 4,426 | (3 | ) | 4,423 | 153 | 4,576 | |||||||
| Changes in minority shareholdings | – | – | (15 | ) | – | (15 | ) | (25 | ) | (40 | ) | ||||
| Distributions to minority shareholders | – | – | – | – | – | (86 | ) | (86 | ) | ||||||
| Dividends to shareholders | – | – | (2,390 | ) | – | (2,390 | ) | – | (2,390 | ) | |||||
| Ordinary shares issued | 7 | 245 | – | – | 252 | – | 252 | ||||||||
| Ordinary shares purchased and held as Treasury shares | – | – | (1,000 | ) | – | (1,000 | ) | – | (1,000 | ) | |||||
| Ordinary shares transferred by ESOP Trusts | – | – | – | 68 | 68 | – | 68 | ||||||||
| Write-down of shares held by ESOP Trusts | – | – | (155 | ) | 155 | – | – | – | |||||||
| Share-based incentive plans | – | – | 240 | – | 240 | – | 240 | ||||||||
| Tax on share based incentive plans | – | – | 25 | – | 25 | – | 25 | ||||||||
| At 31st December 2005 | 1,491 | 549 | 5,579 | (308 | ) | 7,311 | 259 | 7,570 | |||||||
| Recognised income and expense for the year | – | – | 5,248 | 59 | 5,307 | 88 | 5,395 | ||||||||
| Changes in minority shareholdings | – | – | – | – | – | 2 | 2 | ||||||||
| Distributions to minority shareholders | – | – | – | – | – | (87 | ) | (87 | ) | ||||||
| Dividends to shareholders | – | – | (2,598 | ) | – | (2,598 | ) | – | (2,598 | ) | |||||
| Ordinary shares issued | 7 | 309 | – | – | 316 | – | 316 | ||||||||
| Ordinary shares purchased and held as Treasury shares | – | – | (1,348 | ) | – | (1,348 | ) | – | (1,348 | ) | |||||
| Ordinary shares transferred by ESOP Trusts | – | – | – | 151 | 151 | – | 151 | ||||||||
| Write-down of shares held by ESOP Trusts | – | – | (163 | ) | 163 | – | – | – | |||||||
| Share-based incentive plans | – | – | 226 | – | 226 | – | 226 | ||||||||
| Tax on share-based incentive plans | – | – | 21 | – | 21 | – | 21 | ||||||||
| At 31st December 2006 | 1,498 | 858 | 6,965 | 65 | 9,386 | 262 | 9,648 | ||||||||
| Recognised income and expense for the year | – | – | 6,104 | (92 | ) | 6,012 | 122 | 6,134 | |||||||
| Distributions to minority shareholders | – | – | – | – | – | (77 | ) | (77 | ) | ||||||
| Dividends to shareholders | – | – | (2,793 | ) | – | (2,793 | ) | – | (2,793 | ) | |||||
| Ordinary shares issued | 9 | 408 | – | – | 417 | – | 417 | ||||||||
| Ordinary shares purchased and cancelled | (4 | ) | – | (213 | ) | 4 | (213 | ) | – | (213 | ) | ||||
| Ordinary shares purchased and held as Treasury shares | – | – | (3,537 | ) | – | (3,537 | ) | – | (3,537 | ) | |||||
| Ordinary shares acquired by ESOP Trusts | – | – | – | (26 | ) | (26 | ) | – | (26 | ) | |||||
| Ordinary shares transferred by ESOP Trusts | – | – | – | 116 | 116 | – | 116 | ||||||||
| Write-down of shares held by ESOP Trusts | – | – | (292 | ) | 292 | – | – | – | |||||||
| Share-based incentive plans | – | – | 237 | – | 237 | – | 237 | ||||||||
| Tax on share-based incentive plans | – | – | 4 | – | 4 | – | 4 | ||||||||
| At 31st December 2007 | 1,503 | 1,266 | 6,475 | 359 | 9,603 | 307 | 9,910 | ||||||||
| 128 | GSK Annual Report 2007 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
34 Movements in equitycontinued
29 Reserves
| Other | Profit and | |||||
| reserves | loss account | Total | ||||
| (restated) | (restated) | (restated) | ||||
| £m | £m | £m | ||||
| At 31st December 2001 as previously reported | 1,866 | 3,811 | 5,677 | |||
| Prior year adjustment – implementation of UITF 17 (revised) and UITF 38 | (2,970 | ) | 63 | (2,907 | ) | |
| At 31st December 2001 as restated | (1,104 | ) | 3,874 | 2,770 | ||
| Exchange movements | – | (82 | ) | (82 | ) | |
| UK tax on exchange movements | – | (65 | ) | (65 | ) | |
| Ordinary shares purchased and cancelled | 39 | (2,220 | ) | (2,181 | ) | |
| Investment in ESOP shares | 144 | (67 | ) | 77 | ||
| Profit attributable to shareholders | – | 3,930 | 3,930 | |||
| Dividends | – | (2,346 | ) | (2,346 | ) | |
| Unrealised profit on disposal of intellectual property | – | 7 | 7 | |||
| At 31st December 2002 | (921 | ) | 3,031 | 2,110 | ||
| Exchange movements | – | 113 | 113 | |||
| Tax on exchange movements and unrealised profits | – | (92 | ) | (92 | ) | |
| Ordinary shares purchased and cancelled | 20 | (980 | ) | (960 | ) | |
| Investment in ESOP shares | 97 | (64 | ) | 33 | ||
| Profit attributable to shareholders | – | 4,478 | 4,478 | |||
| Dividends | – | (2,374 | ) | (2,374 | ) | |
| Unrealised profit on disposal of intellectual property | – | 7 | 7 | |||
| Revaluation of goodwill due to exchange | _ | (7 | ) | (7 | ) | |
| At 31st December 2003 | (804 | ) | 4,112 | 3,308 | ||
| Goodwill written back | – | 20 | 20 | |||
| Exchange movements | – | (54 | ) | (54 | ) | |
| Tax on exchange movements and unrealised profits | – | (73 | ) | (73 | ) | |
| Ordinary shares purchased and cancelled | 5 | (201 | ) | (196 | ) | |
| Ordinary shares purchased and held as Treasury shares | – | (799 | ) | (799 | ) | |
| Investment in ESOP shares | 155 | (129 | ) | 26 | ||
| Profit attributable to shareholders | – | 4,302 | 4,302 | |||
| Dividends | – | (2,402 | ) | (2,402 | ) | |
| Unrealised loss on disposal of intellectual property | – | (1 | ) | (1 | ) | |
| Revaluation of goodwill due to exchange | – | 6 | 6 | |||
| At 31st December 2004 | (644 | ) | 4,781 | 4,137 | ||
Goodwill arising on acquisitions before 1st January 1998 which has been written off against profitRetained earnings and loss accountother reserves amounts to £6,180 million, including goodwill of £4,840 million previously held as a goodwill reserve which was offset against profit and loss account reserves in 2000. The goodwill written back in 2004 relates to the disposal of part of the Group’s holding in Quest Diagnostics Inc. and the disposal of the Group’s holding in GlaxoSmithKline Pharmaceuticals (Chongqing) Limited. Goodwill denominated in local currencies which is subject to revaluation amounted to £294£6,834 million at 31st December 2004. Goodwill on acquisitions after 1st January 1998 has been capitalised, in accordance with the accounting policy set out in Note 2.
Exchange movements taken to reserves in 2004 include losses2007 (2006 – £7,030 million, 2005 – £5,271 million) of £86which £10,358 million (2003(2006 – losses £27£7,180 million, 20022005 – losses £1,179 million) on foreign currency loans less deposits, gains of £38 million (2003 – gains £133 million, 2002 – gains £1,097 million) on the retranslation of net assets and £6 million (2003 – £7 million, 2002 – £nil) on goodwill eliminated against reserves. The tax on exchange movements and unrealised profits in 2004 of £73 million (2003 – £92 million, 2002 – £65£8,067 million) relates to the taxable element ofcompany and £218 million (2006 – £185 million, 2005 – £180 million) relates to joint ventures and associated undertakings. The cumulative translation exchange in equity is shown in the foreign currency loans less deposits and unrealised profits taken to reserves.following table:
Exchange adjustments debited to reserves cumulatively amount to £1,291 million (2003 – £1,243 million, 2002 – £1,356 million).
| Net translation exchange included in: | ||||||||
| Total | ||||||||
| Fair value | Retained | Minority | translation | |||||
| reserve | earnings | interest | exchange | |||||
| £m | £m | £m | £m | |||||
| At 1st January 2005 | – | 96 | (91 | ) | 5 | |||
| Exchange movements on overseas net assets | 14 | 167 | 22 | 203 | ||||
| Exchange movements on goodwill in reserves | – | 9 | – | 9 | ||||
| At 31st December 2005 | 14 | 272 | (69 | ) | 217 | |||
| Exchange movements on overseas net assets | (5 | ) | (362 | ) | (23 | ) | (390 | ) |
| Exchange movements on goodwill in reserves | – | 31 | – | 31 | ||||
| At 31st December 2006 | 9 | (59 | ) | (92 | ) | (142 | ) | |
| Exchange movements on overseas net assets | – | 408 | 17 | 425 | ||||
| Exchange movements on goodwill in reserves | – | (14 | ) | – | (14 | ) | ||
| At 31st December 2007 | 9 | 335 | (75 | ) | 269 | |||
| The analysis of other reserves is as follows: | Cash flow | |||||||||
| ESOP Trust | Fair value | hedge | Other | |||||||
| shares | reserve | reserve | reserves | Total | ||||||
| £m | £m | £m | £m | £m | ||||||
| At 1st January 2005 | (2,536 | ) | 76 | 2 | 1,930 | (528 | ) | |||
| Transferred to income and expense in the year on disposals | – | (11 | ) | – | – | (11 | ) | |||
| Net fair value movement in the year | – | 11 | (3 | ) | – | 8 | ||||
| Ordinary shares transferred by ESOP Trusts | 68 | – | – | – | 68 | |||||
| Write-down of shares held by ESOP Trusts | 155 | – | – | – | 155 | |||||
| At 31st December 2005 | (2,313 | ) | 76 | (1 | ) | 1,930 | (308 | ) | ||
| Transferred to income and expense in the year on disposals | – | (19 | ) | – | – | (19 | ) | |||
| Transferred to income and expense in the year on impairment | – | (2 | ) | – | – | (2 | ) | |||
| Net fair value movement in the year | – | 82 | (2 | ) | – | 80 | ||||
| Ordinary shares transferred by ESOP Trusts | 151 | – | – | – | 151 | |||||
| Write-down of shares held by ESOP Trusts | 163 | – | – | – | 163 | |||||
| At 31st December 2006 | (1,999 | ) | 137 | (3 | ) | 1,930 | 65 | |||
| Transferred to income and expense in the year on disposals | – | (34 | ) | – | – | (34 | ) | |||
| Transferred to income and expense in the year on impairment | – | (12 | ) | – | – | (12 | ) | |||
| Net fair value movement in the year | – | (42 | ) | (4 | ) | – | (46 | ) | ||
| Ordinary shares purchased and cancelled | – | – | – | 4 | 4 | |||||
| Ordinary shares acquired by ESOP Trusts | (26 | ) | – | – | – | (26 | ) | |||
| Ordinary shares transferred by ESOP Trusts | 116 | – | – | – | 116 | |||||
| Write-down of shares held by ESOP Trusts | 292 | – | – | – | 292 | |||||
| At 31st December 2007 | (1,617 | ) | 49 | (7 | ) | 1,934 | 359 | |||
Other reserves include the merger reserve created on the merger of Glaxo Wellcome and SmithKline Beecham amounting to £1,561 million at 31st December 2004 (20032007 (2006 – £1,561 million; 20022005 – £1,561 million). Other reserves also include the capital redemption reserve created as a result of the share buy-back programme amounting to £81£85 million at 31st December 2004 (20032007 (2006 – £76£81 million, 20022005 – £56£81 million). Following the implementation of UITF 38, investments in own shares held by the ESOP Trusts amounting to £2,574 million at 31st December 2004 (2003 – £2,729 million, 2002 – £2,826 million) are now shown as a deduction from other reserves.
Total reserves amounted to £4,137 million at 31st December 2004 (2003 – £3,308 million, 2002 – £2,110 million), of which £8,303 million (2003 – £8,981 million; 2002 – £10,879 million) relates to the company and £97 million (2003 – £86 million, 2002 – £76 million) relates to joint ventures and associated undertakings.
The profit of GlaxoSmithKline plc for the year was £2,719 million (2003 – £1,436 million, 2002 – £10,598 million), which after dividends of £2,402 million (2003 – £2,374 million, 2002 – £2,352 million), gave a retained profit of £317 million (2003 – loss £938 million, 2002 – profit £8,246 million). After the cost of shares purchased and cancelled of £201 million (2003 – £980 million, 2002 – £2,220 million), shares purchased and held as Treasury shares of £799 million (2003 – £nil, 2002 – £nil) and an unrealised profit on capital reduction by subsidiary of £nil (2003 – £nil, 2002 – £4,096 million), the profit and loss account reserve at 31st December 2004 stood at £8,222 million (2003 – £8,905 million, 2002 – £10,823 million), of which £4,096 million is unrealised (2003 – £4,096 million, 2002 – £4,096 million).
| GSK Annual Report 2007 | 129 |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
The Group is involved in various legal and administrative proceedings, principally product liability, intellectual property, tax, anti-trust and governmental investigations and related private litigation. The Group makes provision for these proceedings on a regular basis as summarised in Notes 2 and 23. The Group may make additional significant provisions for such legal proceedings, as required in the event of further developments in these matters, consistent with generally accepted accounting principles. Litigation, particularly in the USA, is inherently unpredictable and excessive awards that may not be justified by the evidence may occur. The Group could in the future incur judgments or enter into settlements of claims that could result in payments that exceed its current provisions by an amount that would have a material adverse effect on the Group’s financial condition and results of operations.
Intellectual property claims include challenges to the validity of the Group’s patents on various products or processes and assertions of non-infringement of those patents. A loss in any of these cases could result in loss of patent protection for the product at issue. The consequence of any such loss could be a significant decrease in sales of that product and could materially affect future results of operations for the Group.
Legal expenses incurred, relating to the defence of the Group’s intellectual property, and litigation costs and provisions related to product liability claims on existing products, are charged to selling, general and administration costs. Litigation costs and provisions relating to legal claims on withdrawn products, anti-trust and pricing matters are charged to other operating income/expense. Provisions are made, after taking appropriate legal advice, when a reasonable estimate can be made of the likely outcome of the dispute. In 2004 the Group established an actuarially determined provision for product liability claims incurred but not yet reported as described in Note 23. At 31st December 2004 the Group’s aggregate provision for legal and other disputes (not including tax matters described under ‘Taxation’ in Note 12) was just over £1 billion. The ultimate liability for legal claims may vary from the amounts provided and is dependent upon the outcome of litigation proceedings, investigations and possible settlement negotiations.
The most significant of those matters are described below.
Intellectual propertyUSA
PaxilIn the USA a number of distributors of generic drugs filed applications with the FDA to market generic versions of Paxil/Seroxat (paroxetine hydrochloride) prior to the expiration in 2006 of the Group’s patent on paroxetine hydrochloride hemihydrate. Apotex launched its generic version of Paxil in September 2003. Other distributors sought to bring to market anhydrate or other versions of paroxetine hydrochloride and in one case paroxetine mesylate. In response the Group filed actions against all those distributors for infringement of various of the Group’s patents on the basis that the generic anhydrate and other versions infringe because they contain and/or convert to the hemihydrate form and/or infringe other Group patents.
In July 1998, GlaxoSmithKline filed an action against Apotex in the US District Court for the Northern District of Illinois for infringement of the Group’s patent for paroxetine hydrochloride hemihydrate. Apotex had filed an Abbreviated New Drug Application (ANDA) with the US Food and Drug Administration (FDA) seeking approval to introduce a generic form of Paxil. Following a trial in February 2003 the judge ruled GlaxoSmithKline’s patent valid but not infringed by Apotex’s product. On the Group’s appeal of the ruling of non-infringement, the US Court of Appeals for the Federal Circuit (CAFC), which hears all appeals from US District Courts on patent matters, ruled that the Group’s patent was infringed but invalid based upon ‘public use’ in clinical trials prior to the filing date in the USA. The Group filed a petition to the CAFC for rehearing of its appeal by the full court but as of the date of this report no decision on that petition has yet been announced.
In June 1999, GlaxoSmithKline filed an action against Geneva Pharmaceuticals, a subsidiary of Novartis Pharmaceuticals, in the US District Court for the Eastern District of Pennsylvania for infringement of the Group’s patents for paroxetine hydrochloride following notice of Geneva’s ANDA filing. That case has been consolidated with similar infringement actions against other generic companies that subsequently filed ANDAs. Additional infringement actions have been brought based on patents issued subsequent to the original filing against Apotex in the Northern District of Illinois. The Group also filed an action against Apotex relating to those new patents in the Eastern District of Pennsylvania. In December 2002 the judge granted in part and denied in part summary judgement motions filed by Apotex with the result that issues of validity and infringement of three of the four new patents remain for trial. The Group has petitioned the District Court to permit an interim appeal to the CAFC of summary rulings that one of the four new patents and certain claims of the other three are invalid. In June 2003 the Group requested the FDA to remove three patents related to Paxil from the register of pharmaceutical patents maintained by the FDA (the Orange Book). The delisting did not affect the validity of these patents or the related patent litigation. Following FDA approval of its ANDA, Apotex subsequently launched a generic version of Paxil in September 2003.
The Group continues to pursue patent infringement claims in litigation in the Eastern District of Pennsylvania against Apotex, Geneva, Alphapharm, Andrx, Teva Pharmaceuticals and Zenith, and bulk suppliers BASF and Sumika Fine Chemicals. Apotex, Alphapharm, BASF and Sumika have filed counterclaims in these actions alleging that the Group has violated anti-trust or unfair competition laws. In February 2003 the CAFC heard Apotex’s appeal from a decision by the US District Court for the District of Columbia denying Apotex’s request that the FDA be required to delist certain of the Group’s patents for Paxil from the Orange Book. In October 2003 the CAFC affirmed the district court decision and dismissed the case. Certain but not all of the claims and counterclaims with respect to Geneva, Alphapharm, BASF and Sumika have now been settled.
In March 2000, GlaxoSmithKline filed an action against Pentech Pharmaceuticals in the US District Court for the Northern District of Illinois for infringement of the Group’s patents for paroxetine hydrochloride. Pentech filed an ANDA for a capsule version of Paxil, asserting that its compound and presentation do not infringe the Group’s patents or that the patents are invalid.
30Legal proceedings continued
In April 2003, the Group reached a settlement with Pentech and Par Pharmaceuticals to which Pentech had granted rights under Pentech’s ANDA for paroxetine hydrochloride capsules.
The settlement allowed Par to distribute in Puerto Rico substitutable generic paroxetine hydrochloride immediate release tablets supplied and licensed from the Group for a royalty payable to the Group. Par became entitled to distribute the same product in the US market once Apotex’s generic version of Paxil became available there in September 2003. In the settlement Par and Pentech acknowledge that the GlaxoSmithKline patent covering the hemihydrate form of paroxetine hydrochloride is valid and enforceable and would be infringed by Pentech’s proposed capsule product. The Bureau of Competition of the US Federal Trade Commission reviewed the settlement. The review was voluntary and was conducted at the request of the Group, Par and Pentech. Pentech’s former supplier Asahi Glass Co. filed claims alleging that the settlement violated the anti-trust laws. Those claims have been dismissed by the court. Similar claims brought by Apotex and Sumika are pending in the US District Court for the Eastern District of Pennsylvania.
ZofranIn August 2001 the Group commenced an action in the US District Court for the District of New Jersey against Reddy-Cheminor and Dr Reddy’s Laboratories. Dr Reddy had certified invalidity of three patents for ondansetron, the active ingredient in Zofran tablets, including the compound patent that expires in July 2005 and two method of use patents, the later of which expires in December 2006, in both instances taking into account the extension for paediatric exclusivity. In July 2003 the Group filed an action against Dr Reddy’s Laboratories in the same district court for infringement of the Group’s patents related to the orally disintegrating tablet presentation of Zofran. In October 2003 the Group filed an action against West-ward Pharmaceuticals, Inc. in the same district court for infringement of the Group’s patents related to an injectable presentation of Zofran. Both the Dr Reddy disintegrating tablet case and the West-ward case were consolidated with the earlier Dr Reddy case. Prior to trial both Reddy-Cheminor and West-ward withdrew their challenges to the compound patent. The trial over infringement of the Group’s method of use and process patents was completed in June 2004 but as of the date of this report closing arguments have not been held and no decision has been announced.
In March 2002, the Group filed a similar action against Teva Pharmaceuticals USA Inc. in the US District Court for the District of Delaware alleging infringement of the two method of use patents for ondansetron. Teva had certified invalidity or non-infringement of the two method of use patents. Teva did not challenge the compound patent. The trial judge ruled in the Group’s favour, upholding the validity of the method of use patents. Teva appealed that decision to the CAFC and oral argument is expected in the third quarter of 2005. In September 2003, November 2003 and January 2004 the Group filed actions against Teva in the same court for infringement of the Group’s patents related to the injectable and orally disintegrating tablet presentations of Zofran. These cases were consolidated into the case now on appeal.
An earlier ondansetron case, involving orally disintegrating Zofran tablets, was commenced by the Group in January 2003 against Kali Laboratories in the US District Court for the District of New Jersey. Both Kali and the Group have subsequently filed motions for summary judgement.
In June 2003, the Group commenced an action in the US District Court for the District of New Jersey against the Faulding Pharmaceutical Company alleging infringement of the two method of use patents for ondansetron. Faulding did not challenge the compound patent. That case, as of the date of this report, has been stayed pending decisions in the Teva, Reddy and Kali cases.
In August 2004, the Group commenced an action in the US District Court for the District of New Jersey against Pliva alleging infringement of the Group’s patent for a reduced crystal size of ondansetron, which expires in March 2012 taking into account the extension for paediatric exclusivity. Pliva did not challenge the compound patent or the emesis use patents. The case is in its preliminary stages.
In January 2005, the Group commenced two additional actions, both in the US District Court for the District of New Jersey, for the same reduced crystal size patent against Kali and Apotex. In contrast to its previous ANDA for orally disintegrating tablets, Kali did not challenge the emesis use patents in its recent ANDA for oral tablets nor did it challenge the compound patent. Apotex did not challenge either compound or emesis use patents in connection with their ANDA.
LamictalIn August 2002, the Group commenced an action in the US District Court for the District of New Jersey against Teva Pharmaceuticals USA, Inc., alleging infringement of the Group’s compound patent for lamotrigine, the active ingredient in Lamictal oral tablets. That patent affords protection through January 2009 after giving effect to an expected grant of paediatric exclusivity by FDA. The defendant had filed an ANDA with the FDA with a certification of invalidity of the Group’s patent. The Hatch-Waxman stay on the FDA approval of that ANDA has expired. The trial in the Teva case concluded in January 2005. Following the trial the parties reached a settlement agreement subject to government review, pursuant to which the Group has granted Teva an exclusive royalty-bearing licence to distribute in the USA a generic version of lamotrigine chewable tablets on a date not later than June 2005 and the exclusive right to manufacture and sell Teva’s own generic version of lamotrigine tablets in the USA with an expected launch date in 2008.
ImitrexIn December 2003, the Group commenced an action in the US District Court for the Southern District of New York against Dr Reddy’s Laboratories, alleging infringement of one of two primary compound patents for sumatriptan, the active ingredient in Imitrex. The patent at issue affords protection through February 2009 after giving effect to a grant of paediatric exclusivity by the FDA. The defendant has filed an ANDA with the FDA with a certification of invalidity of that compound patent but did not certify invalidity or non-infringement of the second compound patent that expires in June 2007 after giving effect to paediatric exclusivity. The case is in its early stages. Six other generic companies have filed ANDAs for Imitrex but of those only Cobalt Pharmaceuticals has certified invalidity of the same compound patent at issue in the Dr. Reddy’s case. The Group has commenced an infringement action against Cobalt which has recently been transferred to the US District Court for the Southern District of New York. In February 2005, the Group commenced an action in the US District Court for the District of Delaware against Spectrum Pharmaceuticals, alleging infringement of the same compound patent at issue in the Dr. Reddy’s case. Spectrum filed its certification of invalidity or non-infringement of that patent as part of an ANDA filing for approval for sumatriptan injection. The case is in its early stages.
30Legal proceedings continued
ValtrexIn May 2003, the Group commenced an action in the US District Court for the District of New Jersey against Ranbaxy Laboratories, alleging infringement of the Group’s compound patent for valaciclovir, the active ingredient in Valtrex. That patent expires in 2009. The defendant has filed an ANDA with the FDA with a certification of invalidity of the Group’s compound patent and non-infringement of two other patents expiring in 2016 that are listed in the Orange Book. FDA approval of that ANDA is stayed until the earlier of October 2005 or resolution of the patent infringement litigation. Discovery is underway in the case.
Avandia and AvandametIn August 2003, the Group filed an action in the US District Court for the District of New Jersey against Teva Pharmaceuticals USA Inc. for infringement of the Group’s patent relating to the maleate salt form of rosiglitazone, the active ingredient in Avandia, which expires in 2015. In September 2003 the Group filed a comparable action in the same court against Dr Reddy’s Laboratories, alleging infringement of the same patent for the maleate salt form. Both Dr Reddy’s Laboratories and Teva filed ANDAs with the FDA with certifications of invalidity of the Group’s maleate salt patent. FDA approval of those ANDAs is stayed until the earlier of November 2006 or resolution of the respective patent infringement actions.
Teva subsequently filed an additional certification challenging the validity of the Group’s basic compound patent for rosiglitazone, and in January 2004 the Group commenced an action against Teva in the same court for infringement of that patent. The basic compound patent currently expires in 2008, although expiry is expected to be extended to 2012 after the US Patent and Trademark Office has granted patent term restoration.
In January 2005, the Group filed an action in the US District Court for the District of New Jersey against Teva for infringement of the same two patents. Teva had filed an ANDA with the FDA for a generic version of Avandamet with certifications of invalidity and non-infringement of those patents. FDA approval of that ANDA is stayed until the earlier of June 2007 or resolution of the patent infringement action but since Avandamet is protected by the same patents as Avandia, should the Avandia patents at issue be found invalid during the litigation with Teva or Dr. Reddy’s, that ruling would be dipositive for Avandamet as well.
Wellbutrin XLIn December 2004, Biovail commenced actions in the US District Court for the Central District of California against Anchen Pharmaceuticals and in the US District Court for the Southern District of Florida against Abrika Pharmaceuticals, in each case alleging infringement of Biovail formulation patents for Wellbutrin XL. Those patents expire in 2018. Each of Anchen and Abrika had filed an ANDA with the FDA with a certification of invalidity or non-infringement of the Biovail patents. FDA approval of each of those ANDAs is stayed until the earlier of May 2007 or resolution of the applicable patent infringement action. The Group is a party to the action as a licensee under those patents and owner of the New Drug Application for Wellbutrin XL. Both cases are in their early stages.
AdvairIn September 2004, the Group applied to the US Patent and Trademark Office (USPTO) for re-issue of its combination patent for Advair, an inhaled combination of salmeterol and fluticasone propionate, which expires in September 2010. This followed an internal review which concluded that the language in the patent may not accurately describe all of the circumstances of the invention and may not claim the invention as precisely as it could. The objective of seeking re-issuance is to strengthen the protection afforded by the patent. It is expected that the administrative process with the USPTO will take one to two years. While the application for re-issue is pending, the patent remains in force and is listed in the Orange Book.
The Group holds other patents relating to Advair which are not affected by the re-issue application, including the compound patent related to the active ingredient salmeterol which affords protection through August 2008 (after giving effect to an expected grant of paediatric exclusivity by the FDA), various patents relating to the Diskus device which expire over a period from 2011 to 2016 and patents relating to the HFA formulation and related technology which expire over a period from 2015 to 2021.
LevitraIn October 2002, Pfizer Inc. filed an action against Bayer AG and GlaxoSmithKline in the US District Court for the District of Delaware, alleging that the manufacture and sale of Levitra (vardenafil) would infringe a patent newly issued to Pfizer and asking that Bayer and GlaxoSmithKline be permanently enjoined. In September 2003 the US Patent and Trademark Office initiated a re-examination of the Pfizer patent based on questions of patentability in light of prior art. The Pfizer action, including an additional suit filed in the same court following the launch of Levitra in the USA, was predicated on the validity of that patent and was stayed pending the outcome of the re-examination. In December 2004 the parties entered into an agreement to settle patent infringement and validity proceedings on a worldwide basis, including the US action.
CervarixIn February 2005, Merck & Co. and the Group announced a cross licence and settlement agreement for certain patent rights related to human papillomavirus (HPV) vaccine. The Group will receive an upfront payment and royalties from Merck based upon sales of an HPV vaccine upon development and launch. The agreement resolves competing intellectual property claims related to the Merck and GlaxoSmithKline HPV vaccines, respectively.
UK and Europe
SeroxatFollowing settlement in August 2004 of most of the Group’s patent litigation with Synthon BV, Synthon is free to market its paroxetine mesylate product in many markets globally where it has obtained marketing authorisations. Paroxetine mesylate is a different salt form of paroxetine than that used in the marketed form of Seroxat/Paxil. In certain markets patent litigation with Synthon is ongoing and Synthon is asserting counterclaims for unfair competition against the Group.
Another generic version of Seroxat/Paxil’s active ingredient is paroxetine hydrochloride anhydrate. Generic products containing the anhydrate are now on the market in most European countries. Whilst some of these products are the subject of continuing litigation, most actions have now been settled and it is expected that more will be settled in the future. In the UK, litigation of several years standing between the Group and Apotex culminated in an Appeal Court decision that the Group’s anhydrate process patent was valid but not infringed. That decision is not subject to further appeal. As a result of the litigation, Apotex was enjoined from launching its product for about one year but it is now on the market. A damages enquiry relating to the injunction will take place in due course.
Product liability
PaxilThe Group has received lawsuits and claims filed on behalf of patients alleging that they have suffered symptoms on discontinuing treatment with Paxil (paroxetine). Separately, the Group has received lawsuits and claims that patients who had commenced Paxil treatment committed or attempted to commit suicide and/or acts of violence. There are also private consumer lawsuits alleging that the Group concealed and misrepresented data from paediatric clinical trials of Paxil.
The Group has received lawsuits filed in state and federal courts in the USA and Canada on behalf of thousands of plaintiffs, including 14 purported class actions, alleging that paroxetine (the active ingredient in Paxil) is addictive and causes dependency and withdrawal reactions. Plaintiffs seek remedies including compensatory, punitive and statutory damages and the cost of a fund for medical monitoring. In 2003 a federal judge in the US District Court for the Central District of California denied class action certifications for a nationwide class and a California statewide class as to cases filed in federal court in that district. Subsequently, on petition from plaintiffs’ counsel all federal court cases have been transferred to that District Court for consolidation in Multidistrict Litigation (MDL). The first five cases are scheduled to start trial in the MDL court in May 2005. There has been no determination as to whether any of the other lawsuits pending in the MDL or in state courts will be permitted to proceed as class actions.
The Group has received a number of claims and lawsuits alleging that treatment with Paxil has caused homicidal or suicidal behaviour exhibited by users of the product. None of these are or purport to be class actions. In October 2004 the FDA announced that it would require a black box warning about suicidality and other strengthened warnings for selective serotonin reuptake inhibitor (SSRI) products, including Paxil, as a class.
AvandiaThe Group has received lawsuits and claims filed in state and federal courts in the USA on behalf of numerous patients alleging that rosiglitazone (the active ingredient in Avandia) has caused congestive heart failure or liver damage. None of the cases purports to be a class action. Most of the cases are in their early stages although certain state court trials are scheduled to take place in 2005.
PhenylpropanolamineFollowing a report from the Yale Haemorrhagic Stroke Project that found a suggestion of an association between first use of phenylpropanolamine (‘PPA’) decongestant and haemorrhagic stroke, the Group and most other manufacturers have voluntarily withdrawn consumer healthcare products in which PPA was an active ingredient. Since the PPA product withdrawal the Group has been named as a defendant in numerous personal injury and class action lawsuits filed in state and federal courts alleging personal injury or increased risk of injury from use of products containing PPA and unfair and deceptive business practices. Plaintiffs seek remedies including compensatory and punitive damages and refunds. The federal cases have been consolidated in a multidistrict litigation proceeding in the US District Court for the District of Washington. The judge responsible for those proceedings has denied class certification and struck all class allegations in the federal personal injury and consumer refund class actions. A limited number of cases in which the Group or other manufacturers are defendants are now reaching trial in state courts. Class certification has been denied in California state court and a Pennsylvania state court putative class action has been dismissed, leaving no putative class actions pending against the Group in this litigation.
BaycolIn August 2001, Bayer AG withdrew Baycol (cerivastatin sodium) worldwide in light of reports of adverse events, including deaths, involving rhabdomyolosis. GlaxoSmithKline had participated in the marketing of Baycol in the USA pursuant to a co-promotion agreement with Bayer which was the licence holder and manufacturer of the product.
Following the withdrawal, Bayer and GlaxoSmithKline have been named as defendants in thousands of lawsuits filed in state and federal courts in the USA on behalf of both individuals and putative classes of former Baycol users. A number of the suits allege that the plaintiffs have suffered personal injuries, including rhabdomyolosis, from the use of Baycol. Others claim that persons who took Baycol, although not injured, may be at risk of future injury or may have suffered economic damages from purchasing and using Baycol. Plaintiffs seek remedies including compensatory, punitive and statutory damages and creation of funds for medical monitoring. GlaxoSmithKline and Bayer Corporation, the principal US subsidiary of Bayer AG, have signed an allocation agreement under which Bayer Corporation has agreed to pay 95 per cent of all settlements and compensatory damages judgements with each party retaining responsibility for its own attorneys’ fees and any punitive damages. The federal cases have been consolidated in a multidistrict litigation proceeding in the US District Court for the District of Minnesota. Numerous cases are scheduled for trial in state and federal courts during 2005. To date, a statewide medical monitoring class action against Bayer and GlaxoSmithKline has been certified in Pennsylvania, and another class action, in which GlaxoSmithKline was not named as a defendant, has been certified in Oklahoma. A substantial number of claims for death or serious injury have been settled.
30Legal proceedings continued
Fen-PhenIn 1997, the FDA became aware of reports of cardiac valvular problems in individuals for whom fenfluramine or dexfenfluramine alone or in combination with phentermine was prescribed as part of a regimen of weight reduction and requested the voluntary withdrawal of fenfluramine and dexfenfluramine from the market. The reports of cardiac valvular problems and the subsequent withdrawal of those products from the market spawned numerous product liability lawsuits filed against the manufacturers and distributors of fenfluramine, dexfenfluramine and phentermine. As one of a number of manufacturers of phentermine, the Group is a defendant in thousands of lawsuits in various state and federal district courts in the USA. Most of the lawsuits seek relief including some combination of compensatory and punitive damages, medical monitoring and refunds for purchases of drugs. In 1997 the Judicial Panel on Multidistrict Litigation issued an order consolidating and transferring all federal actions to the District Court for the Eastern District of Pennsylvania. That court approved a global settlement proposed by defendant Wyeth, which sold fenfluramine and dexfenfluramine. The settlement, subsequently confirmed by the Third Circuit Court of Appeals, does not include any of the phentermine defendants, including the Group. Individual plaintiffs may elect to opt out of the class settlement and pursue their claims individually and tens of thousands of plaintiffs have elected to do so. Wyeth continues to settle individual state court cases before trial and the Group continues to be dismissed from lawsuits as they are settled by Wyeth.
ThimerosalGlaxoSmithKline, along with a number of other pharmaceutical companies, has been named as a defendant in numerous individual personal injury lawsuits in state and federal district courts in the USA alleging that thimerosal, a preservative used in the manufacture of vaccines, causes neurodevelopmental disorders and other injuries, including autism. Three of the cases are purported class actions; there has been no determination as to whether any of those cases will be permitted to proceed as a class action. A number of purported class actions in other jurisdictions have been withdrawn or dismissed. Plaintiffs seek remedies including compensatory, punitive and statutory damages and the cost of a fund for medical monitoring and research. Although many of the lawsuits are in their early stages, a number of cases are scheduled for trial in 2005.
LotronexFollowing the voluntary withdrawal of Lotronex in the USA in November 2000 a number of lawsuits have been filed against the Group in state and federal district courts, including individual personal injury actions and purported class actions asserting product liability and consumer fraud claims. Plaintiffs seek remedies including compensatory, punitive and statutory damages. The class previously certified in West Virginia has been decertified and the action has been dismissed. A large number of claims brought following the withdrawal have now been settled.
Government investigationsMarketing and promotionIn February 2004, GlaxoSmithKline received a subpoena from the US Attorney’s office in Colorado regarding the Group’s sales and promotional practices relating to nine of its largest selling products for the period from January 1997 to the present.
In particular the government has inquired about alleged promotion of these drugs for off-label uses as well as Group sponsored continuing medical education programmes, other speaker events, special issue boards, advisory boards, speaker training programmes, clinical studies, and related grants, fees, travel and entertainment. Although the original subpoena issued from the US Attorney’s office in Colorado, the scope of the inquiry is nationwide. The Group is co-operating with the investigation which is in its early stages. The Group had earlier responded to an October 2002 letter from the FDA’s Division of Drug Marketing, Advertising and Communication requesting information on the Group’s alleged promotion of Wellbutrin SR for off-label use.
Average wholesale priceGlaxoSmithKline has responded to subpoenas from the Office of the Inspector General of the US Department of Health and Human Services, the US Department of Justice and the states of Texas and California in connection with allegations that pharmaceutical companies, including GlaxoSmithKline, have violated federal fraud and abuse laws such as the Federal False Claims Act (and, with respect to Texas and California, comparable state laws) as a result of the way ‘average wholesale price’ (AWP) was determined and reported for certain drugs and the way the Medicare and Medicaid programmes reimburse for those drugs.
Subsequently, several states through their respective attorneys general and several counties in New York state filed civil lawsuits in state and federal court against GlaxoSmithKline and several other drug companies. The actions claim, on behalf of the states as payers and on behalf of in-state patients as consumers, damages and restitution due to AWP based price reporting for an undefined set of pharmaceutical products covered by the states’ Medicaid programmes. In addition, private payer class action lawsuits have been filed against GlaxoSmithKline in several federal district and state courts. All the federal cases have been consolidated in a multidistrict litigation proceeding in the US District Court for the District of Massachusetts. The Group is one of five companies designated for ‘fast track’ discovery in that proceeding. A hearing on the private-payer plaintiffs’ motion for class certification took place in February 2005 but the judge has not yet ruled on that motion. All of the civil suits filed in state court by state attorneys general and a private payer class action case remanded to state court are in their early stages.
Nominal pricingThe Group has been advised by the US Department of Justice that they are investigating certain of the Group’s nominal pricing arrangements to determine whether those arrangements qualify under the nominal price exception to best price reporting requirements under the Medicaid Drug Rebate Programme or violate civil statutes or laws. The Group is cooperating in that investigation which is being conducted by the same government attorneys involved in the AWP investigation and has provided documents and information regarding nominal pricing arrangements for a number of the Group’s products.
Paxil/SeroxatFollowing announcement of the New York State Attorney General’s office over the state’s lawsuit, subsequently settled in August 2004, alleging failure to disclose data on the use of Paxil in children and adolescents, similar cases, some of which purport to be class actions, have been filed in state and federal courts by private plaintiffs. All those cases are in their early stages.
30Legal proceedings continued
In the UK an investigation remains pending by the UK Medicines and Healthcare products Regulatory Agency (MHRA) to determine whether the Group has complied with its pharmacovigilance obligations in reporting of data from clinical trials for Seroxat/Paxil in children and adolescents.
Cidra, Puerto Rico manufacturing siteIn October 2003 the FDA inspected the Group’s manufacturing facility in Cidra, Puerto Rico. The Cidra site is engaged in tableting and packaging for a range of GlaxoSmithKline products – primarily for the US market – including Paxil, Paxil CR, Coreg, Avandia and Avandamet. Following that inspection the FDA has issued two Forms 483 (‘observations’ of possible deficiencies in manufacturing practices) to the Group. The FDA carried out a further inspection in November 2004 and subsequently issued two further Forms 483. The FDA observations relate to certain aspects of production controls, process validation and laboratory investigations. In response to the FDA's observations, the Group, among other things, voluntarily recalled certain shipments of Paxil CR and Avandamet from wholesalers. In March 2005 the FDA initiated seizures of Paxil CR and Avandamet tablets manufactured at Cidra on grounds that those products failed to meet FDA manufacturing standards. The Group continues to cooperate with the FDA in responding to the observations contained in the Forms 483 and in respect of the recent seizures, but there can be no assurance as to any remedy the FDA may ultimately seek or as to the timing of resumption of distribution of Paxil CR and/or Avandamet.
Anti-trust
PaxilIn November 2000, the US Federal Trade Commission (FTC) staff advised the Group that they were conducting a non-public investigation to determine whether the Group was violating Section 5 of the Federal Trade Commission Act by ‘monopolizing or attempting to monopolize’ the market for paroxetine hydrochloride by preventing generic competition to Paxil and requested the Group to submit certain information in connection with that investigation. In October 2003 the FTC closed its investigation on the basis of its finding that no further action is warranted.
Following public reference to the FTC investigation regarding Paxil, purported class actions were filed in the US District Court for the Eastern District of Pennsylvania on behalf of indirect purchasers, including consumers and third party payers, and direct purchasers. The plaintiffs claimed that the Group monopolized a ‘market’ for Paxil by bringing allegedly sham patent litigation and allegedly abusing the regulatory procedures for the listing of patents in the FDA Orange Book. The court has granted final approval to settlement with the direct purchaser class and preliminary approval to settlement with the purported class of indirect purchasers. The hearing date for final approval for the indirect purchaser class settlement is 9th March 2005. The Group has also reached a final settlement with a group of chain drugstores. In state courts a purported consumer fraud class action in California remains at an early stage and, separately, both a state court class action in California and a federal class action in Florida, each of which is a purported indirect purchaser class action, have been stayed pending disposition of the federal court settlement. A separate action by the City of New York for alleged overcharges is also in its early stages.
Apotex, Alphapharm, BASF and Sumika have filed anti-trust and unfair competition counterclaims against the Group based on allegations similar to those made in the purported class actions identified in the proceeding paragraph. While discovery in the Apotex matter is in the early stages, the three other actions have been stayed.
RelafenIn August 2001, the US District Court for the District of Massachusetts ruled the Group’s patent for nabumetone (Relafen) invalid for anticipatory art and unenforceable on the grounds of inequitable conduct. In August 2002 the CAFC issued a decision affirming the District Court’s judgement of invalidity but declining to rule on the judgement of inequitable conduct.
Following the District Court decision, anti-trust claims alleging competitive injury and overcharges were filed by Teva and Eon Pharmaceuticals, generic manufacturers of nabumetone, by purported classes of direct and indirect purchasers and payers and by individual retail chains.
The plaintiffs’ claims are based on allegations of fraudulent procurement of a patent, wrongful listing of the patent in the FDA Orange Book and prosecution of sham patent infringement litigation. Those cases, which were originally filed in the US District Courts for the District of Massachusetts and the Eastern District of Pennsylvania, were all transferred to the District of Massachusetts. The Group has settled the cases filed by Teva, Eon, a group of major retail pharmacy chains and the class of direct purchasers. The court has given preliminary approval to the settlement that the Group has reached with a class of indirect purchasers. A hearing on final approval of that settlement is scheduled for 4th May 2005. Additionally, a settlement agreement has been signed with the states regarding their ‘global claim’ for alleged overcharges in connection with state purchases of the drug.
AugmentinIn 2002, the US District Court for the Eastern District of Virginia found various patents covering Augmentin invalid. That holding was subsequently affirmed by the CAFC. Following the adverse trial court decision, purported anti-trust class actions were filed on behalf of classes of direct and indirect purchasers that were ultimately consolidated in the US District Court for the Eastern District of Virginia. Plaintiffs alleged that the Group knowingly obtained invalid patents and engaged in other anticompetitive conduct to prevent entry of generic products in violation of the monopolization section of the US anti-trust laws. The court has approved the Group’s settlement of those class action claims. In February 2005 the Group reached an agreement in principle with Lek Pharmaceuticals, a wholly-owned subsidiary of Novartis, to resolve the anti-trust lawsuit filed by Lek in that same District Court which sought lost profits, treble damages, injunctive relief and attorneys’ fees.
Canadian importationThe Group has been named in seven purported class action lawsuits along with eight other pharmaceutical companies. Following the Group’s actions in 2003 to reduce illegal importation of prescription drugs from Canada, the lawsuits allege that the companies entered an unlawful conspiracy to prevent Canadian pharmacies from selling their products to US customers.
The Group has also been named as a defendant, along with thirteen other drug companies, in a state court action in California, in which the plaintiffs, independent pharmacies, allege that the defendants unlawfully conspired to keep prices artificially high in the USA to the detriment of the plaintiffs. In relation to the same matter, the Minnesota State Attorney General has filed a complaint alleging that the Group has violated state anti-trust and commercial laws. All of these actions are in their early stages.
30Legal proceedings continued
Wellbutrin SRIn December 2004, and January and February 2005, lawsuits, several of which purported to be class actions, were filed in the US District Court for the Eastern District of Pennsylvania against the Group on behalf of direct and indirect purchasers of Wellbutrin SR. The complaints allege violations of US anti-trust laws through sham litigation and fraud on the patent office by the Group in obtaining and enforcing patents covering Wellbutrin SR. The complaints follow the introduction of generic competition to Wellbutrin SR in April 2004 after district and appellate court rulings that a generic manufacturer did not infringe the Group’s patents. The cases are in their early stages.
Environmental mattersGlaxoSmithKline has been notified of its potential responsibility relating to past operations and its past waste disposal practices at certain sites, primarily in the USA. Some of these matters are the subject of litigation, including proceedings initiated by the US federal or state governments for waste disposal site remediation costs and tort actions brought by private parties.
GlaxoSmithKline has been advised that it may be a responsible party at approximately 27 sites, of which 14 appear on the National Priority List created by the Comprehensive Environmental Response Compensation and Liability Act (Superfund).
These proceedings seek to require the operators of hazardous waste facilities, transporters of waste to the sites and generators of hazardous waste disposed of at the sites to clean up the sites or to reimburse the government for cleanup costs. In most instances, GlaxoSmithKline is involved as an alleged generator of hazardous waste although there are a few sites where GlaxoSmithKline is involved as a current or former operator of the facility. Although Superfund provides that the defendants are jointly and severally liable for cleanup costs, these proceedings are frequently resolved on the basis of the nature and quantity of waste disposed of at the site by the generator. GlaxoSmithKline’s proportionate liability for cleanup costs has been substantially determined for about 20 of the sites referred to above.
GlaxoSmithKline’s potential liability varies greatly from site to site. While the cost of investigation, study and remediation at such sites could, over time, be substantial, GlaxoSmithKline routinely accrues amounts related to its share of liability for such matters.
Tax mattersPending tax matters are described in Note 12.
31Post balance sheet event
On 10th January 2005, GlaxoSmithKline announced it had agreed to transfer most of its European and International co-promotion rights for Levitra to Bayer for a cash consideration of £148 million and a reduction in the Group’s commitment to fund future research and development on the product.GlaxoSmithKline retains co-promotion or co-marketing rights to Levitra in the USA and more than 20 other markets.
32Related party transactions
GlaxoSmithKline held an 18.6 per cent18.9% interest in Quest Diagnostics Inc. at 31st December 2004 (20032007 (2006 – 21 per cent)18.7%) . The Group and Quest Diagnostics are parties to a long-term contractual relationship under which Quest Diagnostics is the primary provider of clinical laboratory testing to support the Group’s clinical trials testing requirements worldwide. During 2004,2007, Quest Diagnostics provided services of £35£38 million (2003(2006 – £31£48 million) to the Group. At 31st December 2007 the balance payable by GlaxoSmithKline to Quest Diagnostics was £5 million (2006 – £4 million).
In 2004,2007, both the Group and Shionogi & Co. Ltd. entered into transactions with their 50/50 US joint venture company in support of the research and development activities conducted by that joint venture company. During 2004,2007, GlaxoSmithKline provided services to the joint venture of £1£2 million (2003(2006 – £1£2 million). At 31st December 20042007 the balance due to GlaxoSmithKline from the joint venture was £2 million (2003(2006 – £3 million).
Dr Shapiro, a former Non-Executive Director of GlaxoSmithKline plc, received fees of $85,000 (2003(2006 – $85,000) of which $30,000 (2003(2006 – $30,000) was in the form of ADSs, from a subsidiary of the company, for theher membership onof the Group’s Scientific Advisory Board. These fees are included within ‘Annual remuneration’ in the Remuneration Report on pages 4371 to 58.86.
Dr Barzach, a former Non-Executive Director of GlaxoSmithKline plc, received fees of €83,005 (2003 – €72,268) from a subsidiaryThe aggregate compensation of the company for healthcare consultancy provided. These are included within ‘Annual remuneration’Directors, CET and Company Secretary is given in the Remuneration Report.Note 10, ‘Employee Costs’.
36 Reconciliation of profit after tax to operating cash flows
| 2007 | 2006 | 2005 | ||||
| £m | £m | £m | ||||
| Profit after tax | 5,310 | 5,498 | 4,816 | |||
| Tax on profits | 2,142 | 2,301 | 1,916 | |||
| Share of after tax profits of associates and joint ventures | (50 | ) | (56 | ) | (52 | ) |
| Finance income/costs | 191 | 65 | 194 | |||
| Depreciation | 796 | 732 | 710 | |||
| Impairment and assets written off | 206 | 208 | 193 | |||
| Amortisation of intangible assets | 226 | 226 | 194 | |||
| Profit on sale of property, plant and equipment | – | – | (19 | ) | ||
| Profit on sale of intangible assets | (5 | ) | (158 | ) | (203 | ) |
| Profit on sale of equity investments | (32 | ) | (18 | ) | (15 | ) |
| Changes in working capital: | ||||||
| (Increase)/decrease in inventories | (457 | ) | (298 | ) | 47 | |
| Increase in trade and other receivables | (79 | ) | (529 | ) | (397 | ) |
| (Decrease)/increase in trade and other payables | (187 | ) | 354 | 491 | ||
| Decrease in pension and other provisions | (123 | ) | (270 | ) | (453 | ) |
| Share-based incentive plans | 237 | 226 | 236 | |||
| Other | (95 | ) | (78 | ) | 7 | |
| Cash generated from operations | 8,080 | 8,203 | 7,665 | |||
37 Reconciliation of net cash flow to movement in net debt
| 2007 | 2006 | 2005 | ||||
| £m | £m | £m | ||||
| Net debt at beginning of year | (2,450 | ) | (1,237 | ) | (1,984 | ) |
| Implementation of accounting for financial instruments under IAS 39 | – | – | 13 | |||
| Increase/(decrease) in cash and bank overdrafts | 1,411 | (1,956 | ) | 1,384 | ||
| Cash outflow/(inflow) from liquid investments | 39 | 55 | (550 | ) | ||
| Net increase in long-term loans | (3,276 | ) | – | (912 | ) | |
| Net (increase in)/repayment of short-term loans | (1,632 | ) | 739 | 857 | ||
| Net repayment of obligations under finance leases | 39 | 34 | 36 | |||
| Net non-cash funds of subsidiary undertakings acquired | – | – | (68 | ) | ||
| Exchange adjustments | (88 | ) | (9 | ) | 39 | |
| Other non-cash movements | (82 | ) | (76 | ) | (52 | ) |
| Movement in net debt | (3,589 | ) | (1,213 | ) | 747 | |
| Net debt at end of year | (6,039 | ) | (2,450 | ) | (1,237 | ) |
| 130 | GSK Annual Report 2007 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
3337 Reconciliation of net cash flow to movement in net debtcontinued
| At 31.12.06 | Exchange | Other | Acquisitions | Cash flow | At 31.12.07 | |||||||
| Analysis of changes in net debt | £m | £m | £m | £m | £m | £m | ||||||
| Liquid investments | 1,035 | 79 | – | – | 39 | 1,153 | ||||||
| Cash and cash equivalents | 2,005 | 56 | – | 60 | 1,258 | 3,379 | ||||||
| Overdrafts | (243 | ) | (8 | ) | – | – | 93 | (158 | ) | |||
| 1,762 | 48 | – | 60 | 1,351 | 3,221 | |||||||
| Debt due within one year: | ||||||||||||
| Commercial paper | – | – | – | – | (2,064 | ) | (2,064 | ) | ||||
| Eurobonds and Medium-Term Notes | (255 | ) | 3 | (1,233 | ) | – | 252 | (1,233 | ) | |||
| Other | (220 | ) | (12 | ) | (1 | ) | – | 184 | (49 | ) | ||
| (475 | ) | (9 | ) | (1,234 | ) | – | (1,628 | ) | (3,346 | ) | ||
| Debt due after one year: | ||||||||||||
| Eurobonds, Medium-Term Notes andprivate financing | (4,659 | ) | (204 | ) | 1,173 | – | (3,282 | ) | (6,972 | ) | ||
| Other | (113 | ) | (2 | ) | (21 | ) | – | 41 | (95 | ) | ||
| (4,772 | ) | (206 | ) | 1,152 | – | (3,241 | ) | (7,067 | ) | |||
| Net debt | (2,450 | ) | (88 | ) | (82 | ) | 60 | (3,479 | ) | (6,039 | ) | |
For further information on significant changes in net debt see Note 32 ‘Net debt’.
Details of the acquisition and disposal of subsidiary and associated undertakings, joint ventures and other businesses are given below:
| 2004 | Book | Fair value | Net assets | Goodwill | Cost of | |||||
| values | adjustments | acquired | capitalised | acquisition | ||||||
| Acquisitions | £m | £m | £m | £m | £m | |||||
| Fraxiparine, Fraxodi and Arixtra | 135 | 162 | 297 | – | 297 | |||||
Fraxiparine, Fraxodi 2007and ArixtraAcquisitions
Reliant Pharmaceuticals Inc.In September 2004,On 18th December 2007, the Group acquired 100% of the issued share capital of Reliant Pharmaceuticals Inc., a pharmaceutical company based in the USA for a cash consideration of £297£814 million. The company specialises in the development and marketing of speciality medicines to combat heart disease which includes the US rights toLovaza, a treatment for adult patients with very high levels of triglycerides. This transaction has been accounted for by the purchase method of accounting. The goodwill arising on the acquisition reflects the potential for product growth throughout the USA and Puerto Rico and the expected synergies for the Group. Reliant Pharmaceuticals Inc. had a turnover of £276 million and a profit after tax of £8 million for the year, of which £8 million of turnover and £1 million of profit after tax related to the period since acquisition and are included in the Group accounts. The fair values set out below are based on provisional valuations and may be subject to change in the future.
| Book | Fair value | Fair | ||||
| value | adjustment | value | ||||
| £m | £m | £m | ||||
| Net assets acquired | ||||||
| Intangible assets | 13 | 600 | 613 | |||
| Property, plant and equipment | 2 | 4 | 6 | |||
| Other assets including cash and cash equivalents | 80 | 16 | 96 | |||
| Deferred tax provision | – | (175 | ) | (175 | ) | |
| Other liabilities | (75 | ) | (1 | ) | (76 | ) |
| 20 | 444 | 464 | ||||
| Goodwill | – | 350 | 350 | |||
| Total consideration | 20 | 794 | 814 | |||
| GSK Annual Report 2007 | 131 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
38 Acquisitions and disposalscontinued
Domantis Limited
On 5th January 2007, the Group acquired 100% of the issued share capital of Domantis Limited, a drug discovery company based in the UK for a cash consideration of £234 million. The company is developing the next generation of antibody therapies. This transaction has been accounted for by the purchase method of accounting. The goodwill arising on the acquisition reflects the potential for combining the world-leading technology of Domantis with the development programme already in place within GSK to put the Group at the forefront of biotechnology. Domantis Limited had a turnover of £nil and a loss after tax of £10 million for the year, of which £nil of turnover and £9 million of loss after tax related to the period since acquisition and are included in the Group accounts.
| Book | Fair value | Fair | |||||
| value | adjustment | value | |||||
| £m | £m | £m | |||||
| Net assets acquired | |||||||
| Intangible assets | – | 51 | 51 | ||||
| Property, plant and equipment | 1 | – | 1 | ||||
| Other assets including cash and cash equivalents | 19 | – | 19 | ||||
| Deferred tax provision | – | (14 | ) | (14 | ) | ||
| Other liabilities | (4 | ) | – | (4 | ) | ||
| 16 | 37 | 53 | |||||
| Goodwill | – | 181 | 181 | ||||
| Total consideration | 16 | 218 | 234 | ||||
Praecis Pharmaceuticals Inc.
On 16th February 2007, the Group acquired 100% of the issued share capital of Praecis Pharmaceuticals, Inc., a biopharmaceutical company based in the USA for a cash consideration of £39 million. The company has developed a more efficient method of identifying drug leads targeting human disease using proprietary technology. This transaction has been accounted for by the purchase method of accounting. Praecis Pharmaceuticals Inc. had a turnover of £nil and a loss after tax of £11 million for the year, of which £nil of turnover and £9 million of loss after tax related to the period since acquisition and are included in the Group accounts.
| Book | Fair value | Fair | |||||
| value | adjustment | value | |||||
| £m | £m | £m | |||||
| Net assets acquired | |||||||
| Intangible assets | – | 7 | 7 | ||||
| Property, plant and equipment | 1 | – | 1 | ||||
| Other assets including cash and cash equivalents | 25 | – | 25 | ||||
| Deferred tax asset | – | 10 | 10 | ||||
| Other liabilities | (6 | ) | – | (6 | ) | ||
| 20 | 17 | 37 | |||||
| Goodwill | – | 2 | 2 | ||||
| Total consideration | 20 | 19 | 39 | ||||
| Reliant | Domantis | Praecis | Other | Total | ||||||
| Cash flows | £m | £m | £m | £m | £m | |||||
| Cash consideration | 814 | 234 | 39 | 1 | 1,088 | |||||
| Cash and cash equivalents acquired | (20 | ) | (16 | ) | (24 | ) | – | (60 | ) | |
| Net cash payment on acquisitions | 794 | 218 | 15 | 1 | 1,028 | |||||
If Reliant, Domantis and Praecis had been acquired at the beginning of the year, combined Group turnover for the year would have been £22,984 million and combined Group profit for the year would have been £5,314 million.
| 132 | GSK Annual Report 2007 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
38 Acquisitions and disposalscontinued
2006
Acquisitions
CNS, Inc.
On 19th December 2006, the Group acquired 100% of the issued share capital of CNS, Inc., a consumer healthcare company based in the USA for a cash consideration of £280 million. The company marketsBreathe Right nasal dilator strips andFraxiparine, Fraxodi FiberChoice dietary fibre supplements. These are the key intangible assets acquired and Arixtrahave been valued using a discounted cash flow calculation. This transaction has been accounted for by the purchase method of accounting. The goodwill arising on the acquisition reflects the potential for expansion of the brands into other overseas markets and the expected synergies for the Group. CNS, Inc. had a turnover of £71 million (2005 – £60 million) and a profit of £11 million (2005 – profit £9 million) for 2006 of which £2 million of turnover and £nil of profit related assetsto the period since acquisition and are included in the Group accounts.
| Book | Fair value | Fair | |||||
| value | adjustment | value | |||||
| £m | £m | £m | |||||
| Net assets acquired | |||||||
| Intangible assets | 4 | 203 | 207 | ||||
| Property, plant and equipment | 1 | – | 1 | ||||
| Other assets including cash and cash equivalents | 44 | – | 44 | ||||
| Deferred tax provision | – | (77 | ) | (77 | ) | ||
| Other liabilities | (7 | ) | – | (7 | ) | ||
| 42 | 126 | 168 | |||||
| Goodwill | – | 112 | 112 | ||||
| Total consideration | 42 | 238 | 280 | ||||
Euclid SR Partners, LP
During 2006, an additional £5 million was invested in Euclid SR Partners, LP, an associate in which the Group has a 38.7% share.
Shionogi-GlaxoSmithKline Holdings Ltd
During 2006, an additional £8 million was invested in Shionogi GlaxoSmithKline Holdings Ltd, a joint venture in which the Group has a 50% share.
Pliva Research Institute Ltd.
In May 2006, the Group purchased the entire share capital of the Pliva Research Institute Ltd. for a cash consideration of £26 million, of this amount £8 million is deferred, with payment being made when phase I clinical trials are initiated.
GlaxoSmithKline K.K.
In August 2006, a Japanese subsidiary of the Group made a cash payment of £150 million to complete the purchase of the remaining 15% of the share capital held by the minority shareholder. This payment was preceded in the year by a dividend to the minority shareholders of £7 million representing additional consideration.
| Shionogi | Pliva | |||||||||||||
| Euclid SR | GlaxoSmithKline | Research | GlaxoSmith- | |||||||||||
| CNS | Partners, LP | Holdings, Ltd | Institute | Kline K.K. | Other | Total | ||||||||
| Cash flows | £m | £m | £m | £m | £m | £m | £m | |||||||
| Cash consideration | 280 | 5 | 8 | 18 | 157 | – | 468 | |||||||
| Cash and cash equivalents acquired | (24 | ) | – | – | (1 | ) | – | – | (25 | ) | ||||
| Net cash payment on acquisitions | 256 | 5 | 8 | 17 | 157 | – | 443 | |||||||
| Net cash proceeds from disposals | – | – | – | – | – | (5 | ) | (5 | ) | |||||
| GSK Annual Report 2007 | 133 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
38 Acquisitions and disposalscontinued
2005
Acquisitions
ID Biomedical Corporation
On 8th December 2005, the Group acquired 100% of the issued share capital of ID Biomedical Corporation, a biotechnology company based in Canada specialising in the development and manufacture of vaccines, particularly influenza vaccines, for a cash consideration of £874 million. This transaction has been accounted for by the purchase method of accounting. The goodwill arising on the acquisition results from benefits which cannot be separately quantified and recorded, including immediate access to additional ‘flu vaccines manufacturing capacity, particularly in the event of a manufacturing facility.pandemic, a skilled workforce and good relations with the US and Canadian governments regarding the supply of ‘flu vaccines. ID Biomedical Corporation had a turnover of £30 million (2004 – £23 million) and a loss of £83 million (2004 – loss £17 million) for the year, of which £1 million of turnover and £11 million of loss related to the period since acquisition and are included in the Group accounts.
| Book | Fair value | Fair | |||||
| value | adjustment | value | |||||
| £m | £m | £m | |||||
| Net assets acquired | |||||||
| Intangible assets | 15 | 686 | 701 | ||||
| Property, plant and equipment | 88 | – | 88 | ||||
| Other assets | 74 | 23 | 97 | ||||
| Deferred tax provision | – | (225 | ) | (225 | ) | ||
| Other liabilities | (136 | ) | (8 | ) | (144 | ) | |
| 41 | 476 | 517 | |||||
| Goodwill | – | 357 | 357 | ||||
| Total consideration | 41 | 833 | 874 | ||||
The total consideration included directly attributable costs of £3 million.
Corixa Corporation
On 12th July 2005, the Group acquired 92% of the issued share capital of Corixa Corporation, a biotechnology company specialising in developing vaccine adjuvants and immunology based products, for a cash consideration of £150 million. This investment increased the Group’s holding in Corixa to 100%. The Group had a number of business relationships with Corixa prior to the acquisition date, principally in relation to an adjuvant developed by Corixa and used in some of the Group’s vaccines. This transaction has been accounted for by the purchase method of accounting. The existing 8% investment in Corixa, with a book value of £12 million, was previously classified as an available-for-sale investment and now forms part of the investment in the subsidiary. The existing 8% of the issued share capital had been acquired, in previous years, for a cash consideration of £24 million. Corixa Corporation had a turnover of £3 million and a loss of £49 million for the year, of which £1 million of turnover and £24 million of loss related to the period since acquisition and are included in the Group accounts.
| Book | Fair value | Fair | |||||
| value | adjustment | value | |||||
| £m | £m | £m | |||||
| Net assets acquired | |||||||
| Intangible assets | – | 115 | 115 | ||||
| Other assets | 91 | 29 | 120 | ||||
| Other liabilities | (95 | ) | (4 | ) | (99 | ) | |
| (4 | ) | 140 | 136 | ||||
| Goodwill | – | 26 | 26 | ||||
| Existing investment | (12 | ) | – | (12 | ) | ||
| Total consideration | (16 | ) | 166 | 150 | |||
The total consideration included directly attributable costs of £1 million.
| 134 | GSK Annual Report 2007 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
38 Acquisitions and disposalscontinued
Euclid SR Partners, LP
During the year2005, an additional £2 million was invested in Euclid SR Partners, LP, an associate company in which the Group has a 38.7 per cent38.7% interest.
DisposalsGlaxoSmithKline Consumer Healthcare LimitedQuest Diagnostics Inc.In April 2005, an Indian subsidiary of the Group purchased 3.16% of the share capital held by minority shareholders, for a cash consideration of £16 million.
GlaxoSmithKline Pharmaceuticals Limited
In May and June 2005, an Indian subsidiary of the Group purchased 1.52% of the share capital held by minority shareholders, for a cash consideration of £26 million.
GlaxoSmithKline Biologicals (Shanghai) Limited
During 2004,2005, a Chinese subsidiary of the Group purchased all of the share capital held by minority shareholders for a cash consideration of £4 million.
Disposals
Ideapharm SA
In December 2005, the Group disposed of 3.8 million shares from its investment in Quest Diagnostics Inc. for cash proceeds of £188 million, reducing the Group’s shareholding at 31st December 2004 to 18.6 per cent. After recognising a charge for goodwill previously written off to reserves of £17 million a profit of £139 million was recognised.
GlaxoSmithKline Vehicle Finance LtdDuring 2004, the Group disposed of its employee vehicle financing subsidiary resulting in a loss of £3 million.
GlaxoSmithKline Pharmaceuticals (Chongqing) LtdDuring 2004, the Group disposed of GlaxoSmithKline Pharmaceuticals (Chongqing) Ltd, a Group subsidiary located in China, for £7 million. A profit on disposal of £1 million was realised, after recognising a charge for goodwill previously written off to reserves of £3 million.
Beeyar Investments (Pty) LtdIn July 2004, the Group disposed of Beeyar Investments (Pty) Ltd, a subsidiary located in South Africa, for cash proceeds of £1 million, realising a profit of £1 million.
OptiLead S.r.l.During the year, part of the Group’s holding in an associated undertaking, OptiLead S.r.l. was sold, resulting in a loss of £1 million.
| Fraxiparine | GSK | GSK | ||||||||||||
| Fraxodi | Quest | Vehicle | Pharmaceuticals | Beeyar | ||||||||||
| and Arixtra | Euclid SR | Diagnostics | Finance | (Chongqing) | Investments | Total | ||||||||
| Cash flows | £m | £m | £m | £m | £m | £m | £m | |||||||
| Cash consideration paid | 297 | 2 | – | – | – | – | 299 | |||||||
| Net cash proceeds from disposals | – | – | 188 | 34 | 7 | 1 | 230 | |||||||
| 2003 | Book | Fair value | Net assets | Goodwill | Cost of | |||||
| values | adjustments | acquired | capitalised | acquisition | ||||||
| Acquisitions | £m | £m | £m | £m | £m | |||||
| Europharm | 1 | – | 1 | 2 | 3 | |||||
EuropharmDuring 2003, the Group completed the buyout of the minority interests in Europharm HoldingsIdeapharm SA, a Group subsidiary located in Romania, for cash proceeds of £3 million, giving rise to goodwillwhich were received in January 2006. The net assets disposed of a furtherin the year included cash of £2 million, which has been capitalised.million.
Iterfi - SterilyoAseptic Technologies S.A.During 2003, a further paymentIn April 2005, the Group disposed of £9 million was made pursuant16.22% of Aseptic Technologies S.A. to the 2002 acquisition agreement based on the financial performanceSociete Regionale d’Investissement de Wallonie S.A. for cash proceeds of the acquired company. This amount has been included as deferred compensation in 2002.£10 million.
| GSK | GSK | GSK | |||||||||
| Biologicals | Aseptic | Pharma- | Consumer | Euclid | ID | ||||||
| Cash flows | (Shanghai) | Tech. | ceuticals | Healthcare | Ideapharm | SR | Corixa | Biomedical | |||
| £m | £m | £m | £m | £m | £m | £m | £m | Total | |||
| Cash consideration | 4 | – | 26 | 16 | – | 2 | 150 | 874 | 1,072 | ||
| Cash and cash equivalents acquired | – | – | – | – | – | – | (7 | ) | 9 | 2 | |
| Net cash payment on acquisitions | 4 | – | 26 | 16 | – | 2 | 143 | 883 | 1,074 | ||
| Cash and cash equivalents disposed | – | – | – | – | 2 | – | – | – | 2 | ||
| Net cash proceeds from disposals | – | 10 | – | – | – | – | – | – | 10 | ||
| GSK Annual Report 2007 | 135 |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
| 2007 | 2006 | ||
| Contractual obligations and commitments | £m | £m | |
| Contracted for but not provided in the financial statements: | |||
| Intangible assets | 5,730 | 3,219 | |
| Plant, property and equipment | 597 | 521 | |
| Investments | 65 | 196 | |
| Purchase commitments | 159 | 299 | |
| Business combinations | – | 258 | |
| Pensions | 650 | 975 | |
| Theravance put option agreement | – | 258 | |
| Other commitments | 32 | 65 | |
| Interest on loans | 5,170 | 2,875 | |
| Finance lease charges | 14 | 21 | |
| 12,417 | 8,687 | ||
The commitments related to intangible assets include milestone payments, which are dependent on successful clinical development and which represent the maximum that would be paid if all milestones are achieved. A number of commitments were made in 2007 under licensing and other agreements, including arrangements with Anacor Pharmaceuticals, Inc., Oncomed Pharmaceuticals, Inc., Santaris Pharma A/S and Targacept, Inc.
In 2006, GSK formalised an agreement with the trustees of the UK pension schemes to make additional contributions of up to £325 million per year, in addition to the normal contributions, over a four-year period ending 31st December 2009 in order to eliminate the then pension deficits on an IAS 19 basis by that point. The table above shows this commitment, but excludes the normal ongoing annual funding requirement of approximately £200 million. GSK has also committed to eliminate any future deficits that may arise over a rolling five-year period. No other commitments have been made past 31st December 2009.
At 31st December 2006, the Group was party to a put option agreement whereby Theravance’s shareholders could sell up to half of their Theravance shares to GSK at a pre-determined price ($19.375) . Given the maximum number of shares subject to the put option, the Group’s obligation was capped at $525 million. The put option expired unexercised in August 2007.
The Group also has other commitments which principally relate to revenue payments to be made under licences and other alliances.
Commitments in respect of future interest payable on loans are disclosed after taking into account the effect of interest rate swaps.
| 2007 | 2006 | ||
| Commitments under operating leases | £m | £m | |
| Rental payments due within one year | 101 | 94 | |
| Rental payments due between one and two years | 76 | 74 | |
| Rental payments due between two and three years | 58 | 55 | |
| Rental payments due between three and four years | 41 | 41 | |
| Rental payments due between four and five years | 33 | 33 | |
| Rental payments due after five years | 51 | 77 | |
| Total commitments under operating leases | 360 | 374 | |
On 25th January 2008, the FDA issued a not approvable letter in respect of Merck’s NDA seeking approval for over-the-counter Mevacor. This triggered repayment to GSK of the upfront fee GSK had paid to Merck in 2007 for the US OTC rights.
On 18th February 2008, GSK’s long-term Standard and Poor’s debt rating was revised from AA with negative outlook to A+ stable. Standard and Poor’s also revised GSK’s short-term rating for paper issued under the Group’s commercial paper programme from A-1+ to A-1.
| 136 | GSK Annual Report 2007 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
41 Financial instruments and related disclosures
GlaxoSmithKline plc reports in Sterling and pays dividends out of sterling profits. The role of Corporate Treasury in GSK is to manage and monitor the Group’s external and internal funding requirements and financial risks in support of Group corporate objectives. Treasury activities are governed by policies and procedures approved by the Board of Directors, most recently on 5th October 2007.
A Treasury Management Group (TMG) chaired by the Group’s Chief Financial Officer, meets on a monthly basis to review treasury activities. Its members receive management information relating to treasury activity. The Corporate Executive Team (CET) also review a monthly finance report which focuses on operational finance issues. The Group’s internal auditors review the Treasury internal control environment regularly.
GSK uses a variety of financial instruments, including derivatives, to finance its operations and to manage market risks from those operations. Derivatives, principally comprising forward foreign currency contracts, interest rate and currency swaps, are used to swap borrowings and liquid assets into currencies required for Group purposes and to manage exposure to funding risks from changes in foreign exchange rates and interest rates.
GSK does not hold or issue derivative financial instruments for speculative purposes and the Group’s Treasury policies specifically prohibit such activity. All transactions in fi nancial instruments are undertaken to manage the risks arising from underlying business activities, not for speculation.
Capital management
The capital structure of the Group consists of net debt (see Note 32, ‘Net debt’) and shareholders’ equity (see Note 34, ‘Movements in equity’). The Group manages its capital to ensure that entities in the Group are able to operate as going concerns and to optimise return to shareholders through an appropriate balance of debt and equity. In July 2007, GSK announced an increased share buy-back programme of £12 billion over the period to July 2009 which will result in substantially increased borrowings. The Board reviews the Group’s dividend policy and funding requirements annually.
GSK operates globally, primarily through subsidiary companies established in the markets in which the Group trades. With significant levels of patent and trademark protection the Group’s products compete largely on product efficacy rather than on price. Selling margins are sufficient to cover normal operating costs and the Group’s operating subsidiaries are generally cash generative. None of the entities in the Group is subject to externally imposed capital requirements.
Operating cash flow is used to fund investment in research and development of new products as well as to make the routine outflows of capital expenditure, tax, dividends and repayment of maturing debt.
The Group’s policy is to borrow centrally, using a variety of capital market issues and borrowing facilities, to meet anticipated funding requirements.
These borrowings, together with cash generated from operations, are on-lent within the Group, contributed as equity to certain subsidiaries or used to fund the Group’s £12 billion share buy-back programme.
Liquidity risk
The Group manages its net borrowing requirements through a portfolio of long-term borrowings, including bonds, together with short-term finance under the US$10 billion commercial paper programme. At 31st December 2007, the Group also had $5 billion committed undrawn bank facilities.
The Group has a European Medium Term Note programme of £10 billion, of which £7.2 billion was in issue as at 31st December 2007 and a US Shelf Registration of $5 billion; at 31st December 2007, $2.0 billion (£1.0 billion) was in issue. The TMG monitors the cashflow forecast of GSK on a monthly basis.
The Group’s long-term borrowings mature at dates between 2008 and 2042. On 18th February 2008 GSK’s long-term Standard and Poor’s debt rating was revised from AA with negative outlook to A+ stable. At this time, Standard and Poor’s also revised GSK’s short-term rating for paper issued under the Group’s commercial paper programme from A-1+ to A-1. Moody’s Investors’ Services rate GSK as A1 with negative outlook for long-term debt and P-1 for short-term debt. There has been no change to GSK’s rating from Moody’s since 25th July 2007.
In the light of likely increased commercial paper issuance resulting from the increased share buy-back programme, GSK has increased its committed bank facilities from $900 million to $5 billion. In addition, the Group maintains substantial cash and liquid investments which at 31st December 2007 amounted to £4.5 billion.
Market risk
Interest rate risk management
GSK’s policy on interest rate risk management requires the minimum amount of net borrowings at fixed rates to increase with the ratio of forecast interest payable to trading profit. The fixed to floating ratio is reviewed monthly by the TMG.
The Group uses a limited number of interest rate swaps to redenominate external borrowings into the interest rate coupon required for Group purposes. The duration of these swaps matches the duration of the principal instruments. Interest rate derivative instruments are accounted for as fair value or cash flow hedges of the relevant assets or liabilities.
Foreign exchange risk management
Foreign currency transaction exposure arising on normal trade flows, in respect of both external and intra-Group trade, is not hedged. The exposure of overseas operating subsidiaries to transaction risk is minimised by matching local currency income with local currency costs. For this purpose, intra-Group trading transactions are matched centrally and intra-Group payment terms are managed to reduce risk. Exceptional foreign currency cash flows are hedged selectively under the management of Corporate Treasury.
The Group manages centrally the short-term cash surpluses or borrowing requirements of subsidiary companies and uses forward contracts to hedge future repayments back into the originating currency.
The Group seeks to denominate borrowings in the currencies of its principal assets and cash flows. These are primarily denominated in US dollars, Euros and Sterling. Certain borrowings are swapped into other currencies as required for Group purposes.
| GSK Annual Report 2007 | 137 |
| FINANCIALSTATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
33Acquisitions and disposals continued
DisposalsSB Clinical LaboratoriesAn additional cash refund of £3 million was received during 2003 in respect of indemnified liabilities arising from the SB Clinical Laboratories disposal which occurred in 1999. This refund follows the successful outcome of a case in the US Court of Appeal.
| Iterfi- | SB Clinical | |||||||||
| Sterilyo | Europharm | Laboratories | Other | Total | ||||||
| Cash flows | £m | £m | £m | £m | £m | |||||
| Cash consideration paid | 9 | 3 | – | 3 | 15 | |||||
| Net cash proceeds from disposals | – | – | 3 | – | 3 | |||||
| 2002 | Book | Fair value | Net assets | Goodwill | Cost of | |||||
| values | adjustments | acquired | capitalised | acquisition | ||||||
| Acquisitions | £m | £m | £m | £m | £m | |||||
| Iterfi – Sterilyo | (7 | ) | 4 | (3 | ) | 21 | 18 | |||
| Human Kft | 10 | – | 10 | 1 | 11 | |||||
| Other | – | – | – | 1 | 1 | |||||
| 3 | 4 | 7 | 23 | 30 | ||||||
Iterfi – SterilyoDuring 2002, the Group acquired Iterfi-Sterilyo Group for an initial cash consideration of £9 million. A further payment was paid during 2003, of £9 million, which was based on the financial performance of the acquired company during 2002. The net assets of Iterfi-Sterilyo have been incorporated in the financial statements at their provisional fair values. No adjustments were made to these values in 2003.
Human KftDuring 2002, the Group acquired the vaccine related assets of Human Kft, a manufacturing business located in Hungary, for a cash consideration of £11 million.
DisposalsSB Clinical LaboratoriesA cash refund of £6 million was received during 2002 in respect of indemnified liabilities arising from the SB Clinical Laboratories disposal which occurred in 1999. The refund follows the successful outcome of a case in the US Court of Appeal.
| SB Clinical | Iterfi - | Human | ||||||||
| Laboratories | Sterilyo | Kft | Other | Total | ||||||
| Cash flows | £m | £m | £m | £m | £m | |||||
| Cash consideration paid | – | 9 | 11 | 6 | 26 | |||||
| Net cash proceeds from disposals | 6 | – | – | – | 6 | |||||
3441 Financial instruments and related disclosurescontinued
PoliciesDiscussion of the Group’s objectives and policies for the management of financial instruments and associated risks is included under ‘Treasury Policies’ in the Operating and financial review and prospects on pages 74 to 75.
InvestmentsThe Group holds a number of equity investments, frequently in entities where the Group has entered into research collaborations. The Group seeks to realise the value in these investments, which in part the research collaboration helps to create, and therefore certain of these investments are regarded as available for sale and are accounted for as current asset investments. For the purposes of US GAAP all the current asset investments are classified as available for sale.
In 2002, GlaxoSmithKline hedged part of the equity value of its holdings in its largest equity investment, Quest Diagnostics Inc. through a series of variable sale forward contracts. These contracts (the ‘equity collar’) are structured in five series, each over one million Quest shares, and mature between 2006 and 2008.
The Group has liquid investments, representing funds surplus to immediate operating requirements, which are accounted for as current asset investments. For the purposes of US GAAP the investments are classified as available for sale. The proceeds from sale of investments classified as available for sale under US GAAP were £15,048 million in the year ended 31st December 2004. The proceeds include the roll-over of liquid funds on short-term deposit. Under US GAAP the gross gains and losses reflected in the consolidated profit and loss account in respect of investments classified as available for sale were £34 million and £2 million, respectively.
Foreign exchange risk managementThe Group has entered into forward foreign exchange contracts in order to swap liquid assets and borrowings into the currencies required for Group purposes. At 31st December 2004 the Group had outstanding contracts to sell or purchase foreign currency having a total notional principal amount of £11,137 million (2003 – £8,544 million). The majority of contracts are for periods of 12 months or less.
At the end of 2004, the Group had a number of currency swaps in place in respect of medium-term debt instruments. Borrowings denominated in, or swapped into, foreign currencies whichthat match investments in overseas Group assets are treated as a hedge against the relevant netassets. The ratio of borrowings to assets and exchange gains or losses are recorded in reserves.is reviewed by currency on a month by month basis by the TMG.
Interest rateCredit risk managementTo manageThe Group considers its maximum credit risk to be £8,529 million (2006 – £7,848 million) which is the fixed/floating interest rate profiletotal of the Group’s financial assets with the exception of ’Other investments’ which do not bear credit risk, and US treasury bills, bonds and notes, classified within cash and cash equivalents and liquid investments.
US treasury bills, bonds and notes are held both directly and through US Treasuries–only money market funds and bear credit exposure to the US government. See page 139 for details on the Group’s total financial assets.
Treasury-related credit risk
In 2007, credit risk increased following the global sub-prime crisis. GSK has suffered no loss of investment principal as a result of this crisis. The Group invests centrally managed liquid assets in government bonds, short-term corporate debt instruments with a minimum short-term credit rating of A-1/P-1, bank deposits, Treasuries-only money market funds with a credit rating of AAA/Aaa (Standard and Poor’s/Moody’s Investors’ Services) and other structured investments.
A report on relationship banks and their credit ratings is presented annually to the TMG for approval.
The aggregate credit risk in respect of financial instruments the Group may have with one counterparty is limited by reference to the long-term credit ratings assigned for that counterparty by Moody’s and Standard and Poor’s.
Wholesale and retail credit risk
In the USA, in line with other pharmaceutical companies, the Group sells its products through a small number of wholesalers in addition to hospitals, pharmacies, physicians and other groups. Sales to the three largest wholesalers amount to approximately 85% of the Group’s US pharmaceutical sales. At 31st December 2007, the Group had several interest rate swaps outstanding with commercial banks at 31st December 2004.
Concentrations of credit risk and credit exposures of financial instrumentsThe Group does not believe it is exposed to major concentrations of credit risk on its financial instruments.trade receivables due from these three wholesalers totalling £915 million (2006 – £1,044 million). The Group is exposed to credit-related losses in the event of non-performance by counterparties to financial instruments, but does not expect any counterparties to fail to meet their obligations.
The Group applies Board-approved limits to the amounta concentration of credit exposurerisk in respect of these wholesalers such that, if one or more of them encounters financial difficulty, it could materially and adversely affect the Group’s financial results.
The Group’s credit risk monitoring activities relating to any one counterpartythese wholesalers includes review of their quarterly financial information and employs strict minimumStandard & Poor’s credit worthiness criteria as toratings, development of GSK internal risk ratings, and establishment and periodic review of credit limits. However, the choiceGroup believes there is no further credit risk provision required in excess of counterparty.the normal provision for bad and doubtful debts (see Note 24, Trade and other receivables’). Outside the USA no customers account for more than 5% of the trade receivables balance.
Fair value of financial assets and liabilities
The table on page 126139 presents the carrying amounts under UK GAAP and the fair values of the Group’s financial assets and liabilities at 31st December 20042007 and 31st December 2003. Debtors and creditors due within one year have been excluded.2006.
The fair values of the financial assets and liabilities are included at the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The following methods and assumptions were used to estimate the fair values:
| • | |
| Cash | |
| • | Liquid investments – based on quoted market prices |
| • | Other investments – investments traded in an active marketdetermined by reference to the relevant stock exchange quotedbid price; other investments determined by reference to thecurrent market value of similar instruments or by reference to thediscounted cash flows of the underlying net assets |
| • | Short-term loans and overdrafts – approximates to the |
| • | Long-term loans – |
| • | Forward exchange contracts – based on market prices and |
| • | Currency swaps – based on market |
| • | Quest equity collar and Theravance put and call options – |
| • | Interest rate |
| • | Receivables and |
| • | Lease obligations – approximates to the carrying amount |
Fair value of investments in ownGSK sharesThe Group had atAt 31st December 2004 investments in own2007, the ESOP Trusts held GSK shares with a carrying value of £2,574£1,617 million (2003(2006 – £2,729£1, 999 million) with a fair value of £2,123£1,721 million (2003(2006 – £2,276£2,062 million) based on quoted market price. The shares represent purchases by the ESOP Trusts to satisfy future exercises of options and awards under employee incentive schemes. They are excluded from financial instrument disclosure.
34Financial instruments and related disclosures continued
Classification and fair values of financial assets and liabilitiesThe following table sets out the classification of financial assets and liabilities and provides a reconciliation to Group net debt in Note 25. Short-term debtors and creditors have been excluded from financial assets and liabilities. Provisions have been included where there is a contractual obligation to settle in cash.
2004 | 2003 | |||||||
Carrying amount £m | Fair value £m | Carrying amount £m | Fair value £m | |||||
| Net debt | ||||||||
| Liquid investments | 2,818 | 2,820 | 2,493 | 2,509 | ||||
| Cash at bank | 1,161 | 1,161 | 962 | 962 | ||||
| Current asset financial instruments | 3,979 | 3,981 | 3,455 | 3,471 | ||||
| Sterling notes and bonds | (1,475 | ) | (1,533 | ) | (1,474 | ) | (1,552 | ) |
| (1,475 | ) | (1,533 | ) | (1,474 | ) | (1,552 | ) | |
| US dollar notes, bonds and private financing | (1,828 | ) | (1,817 | ) | (866 | ) | (893 | ) |
| Notes and bonds swapped into US dollars | (498 | ) | (497 | ) | (498 | ) | (499 | ) |
| Currency swaps | – | 92 | – | 59 | ||||
| Interest rate swaps | – | (28 | ) | – | (2 | ) | ||
| (2,326 | ) | (2,250 | ) | (1,364 | ) | (1,335 | ) | |
| Notes and bonds swapped into Yen | (348 | ) | (338 | ) | (463 | ) | (457 | ) |
| Currency swaps | – | 10 | – | 3 | ||||
| (348 | ) | (328 | ) | (463 | ) | (454 | ) | |
| Euro notes and bonds | (705 | ) | (717 | ) | (699 | ) | (700 | ) |
| Interest rate swap | – | 12 | – | (4 | ) | |||
| (705 | ) | (705 | ) | (699 | ) | (704 | ) | |
| Other medium-term borrowings | (79 | ) | (79 | ) | (34 | ) | (34 | ) |
| Other short-term loans and overdrafts | (1,030 | ) | (1,030 | ) | (1,069 | ) | (1,069 | ) |
| Total borrowings | (5,963 | ) | (5,925 | ) | (5,103 | ) | (5,148 | ) |
| Total net debt | (1,984 | ) | (1,944 | ) | (1,648 | ) | (1,677 | ) |
| Fixed asset equity investments | 145 | 151 | 98 | 100 | ||||
| Current asset equity investments | 153 | 199 | 164 | 237 | ||||
| Other debtors due after 1 year | 597 | 499 | 522 | 522 | ||||
| Other creditors due after 1 year | (244 | ) | (244 | ) | (232 | ) | (232 | ) |
| Provisions | (256 | ) | (256 | ) | (245 | ) | (245 | ) |
| Other foreign exchange derivatives | (67 | ) | (79 | ) | 52 | 71 | ||
| Non-hedging derivatives | – | (59 | ) | – | 36 | |||
| Auction rate preference stock | – | – | (224 | ) | (224 | ) | ||
| Flexible auction market preferred stock | – | – | (279 | ) | (279 | ) | ||
| Total non-equity minority interests | – | – | (503 | ) | (503 | ) | ||
| Total financial assets and liabilities | (1,656 | ) | (1,733 | ) | (1,792 | ) | (1,691 | ) |
| Total financial assets | 4,874 | 4,830 | 4,291 | 4,437 | ||||
| Total financial liabilities | (6,530 | ) | (6,563 | ) | (6,083 | ) | (6,128 | ) |
Where appropriate, currency and interest rate swaps have been presented alongside the underlying principal instrument. The carrying amountsvalue, which is the lower of cost or expected proceeds, of these instruments haveshares has been adjusted for the effect of the currency and interest rate swaps acting as hedges.
The difference between the carrying amount and the fair value of equity (fixed and current assets) and liquid investments represents gross unrealised gains of £52 million and £2 million, respectively.
34Financial instruments and related disclosures continued
Currency and interest rate risk profile of financial liabilitiesFinancial liabilities, after taking account of currency and interest rate swaps, are analysed below.
Total financial liabilities comprise total borrowings of £5,963 million (2003 – £5,103 million), other creditors due after one year of £244 million (2003 – £232 million), provisions of £256 million (2003 – £245 million) and non-equity minority interest preference shares of nil (2003 – £503 million) but exclude creditors due within one year and foreign exchange derivatives of £67 million (2003 – £nil). The benchmark rate for determining interest payments for all floating rate financial liabilities in the tables below is LIBOR.
| Fixed rate | Floating rate | Non-interest bearing | ||||||||||||
| At 31st December 2004 Currency | £m | % Weighted average interest rate | Weighted average years for which rate is fixed | £m | £m | Weighted average years to maturity | Total £m | |||||||
| US dollars | 571 | 5.9 | 13.8 | 1,764 | 411 | 8.9 | 2,746 | |||||||
| Sterling | 1,489 | 6.4 | 19.3 | 842 | 123 | 2.1 | 2,454 | |||||||
| Euro | – | – | – | 747 | 44 | 5.3 | 791 | |||||||
| Japanese Yen | 348 | 0.4 | 4.6 | – | – | – | 348 | |||||||
| Other currencies | – | – | – | 89 | 35 | 6.1 | 124 | |||||||
| 2,408 | 5.4 | 15.9 | 3,442 | 613 | 4.6 | 6,463 | ||||||||
| Fixed rate | Floating rate | Non-interest bearing | ||||||||||||
At 31st December 2003 Currency | £m | Weighted | Weighted average years for which rate is fixed | £m | £m | Weighted average years to maturity | Total £m | |||||||
| US dollars | 279 | 6.1 | 2.1 | 1,676 | 311 | 10.5 | 2,266 | |||||||
| Sterling | 1,478 | 6.4 | 20.4 | 852 | 100 | 4.1 | 2,430 | |||||||
| Euro | 3 | – | – | 750 | 34 | 5.6 | 787 | |||||||
| Japanese Yen | 463 | 0.5 | 4.3 | 52 | – | – | 515 | |||||||
| Other currencies | 14 | – | – | 39 | 32 | 4.8 | 85 | |||||||
| 2,237 | 5.1 | 14.7 | 3,369 | 477 | 8.4 | 6,083 | ||||||||
Currency and interest rate risk profile of financial assetsTotal financial assets comprise fixed asset equity investments of £145 million (2003 – £98 million), current asset equity investments of £153 million (2003 – £164 million), liquid investments of £2,818 million (2003 – £2,493 million), cash at bank of £1,161 million (2003 – £962 million) and debtors due after one year of £597 million (2003 – £522 million), but exclude foreign exchange derivatives of £nil (2003 – £52 million). The benchmark rate for determining interest receipts for all floating rate assets in the tables below is LIBOR.
Fixed rate | Floating rate | Non-interest bearing | ||||||||||
At 31st December 2004 Currency | Fixed rate £m | Weighted average interest rate % | Weighted average years for which rate is fixed | £m | £m | Total £m | ||||||
| US dollars | 164 | 6.2 | 11.9 | 1,429 | 757 | 2,350 | ||||||
| Sterling | – | – | – | 1,088 | 89 | 1,177 | ||||||
| Euro | – | – | – | 629 | 57 | 686 | ||||||
| Japanese Yen | – | – | – | 1 | 28 | 29 | ||||||
| Other currencies | 155 | 3.0 | 0.2 | 353 | 124 | 632 | ||||||
| 319 | 4.7 | 6.2 | 3,500 | 1,055 | 4,874 | |||||||
| Fixed rate | Floating rate | Non-interest bearing | ||||||||||
At 31st December 2003 Currency | Fixed rate £m | Weighted average interest rate % | Weighted average years for which rate is fixed | £m | £m | Total £m | ||||||
| US dollars | 300 | 6.6 | 5 | 1,248 | 479 | 2,027 | ||||||
| Sterling | 20 | 7.8 | 2.6 | 1,209 | 60 | 1,289 | ||||||
| Euro | 1 | 3.0 | 0.6 | 328 | 77 | 406 | ||||||
| Japanese Yen | – | – | – | 1 | 33 | 34 | ||||||
| Other currencies | 103 | 2.7 | 0.1 | 293 | 87 | 483 | ||||||
| 424 | 5.0 | 3.6 | 3,079 | 736 | 4,239 | |||||||
34Financial instruments and related disclosures continued
Currency exposure of net monetary assets/(liabilities)The Group’s currency exposures that give rise to net currency gains and losses that are recognised in the profit and loss account arise principally in companies with sterling functional currency. Monetary assets and liabilities denominated in overseas functional currency and borrowings designated as a hedge against overseas net assets are excludeddeduction from the table below.
| Functional currency of Group operation | ||||||||||||
At 31st December 2004 | ||||||||||||
Net monetary assets/(liabilities) held in non-functional currency | Sterling £m | US$ £m | Euro £m | Yen £m | Other £m | Total £m | ||||||
| Sterling | – | 5 | (53 | ) | – | (130 | ) | (178 | ) | |||
| US dollars | 234 | – | 18 | (1 | ) | (23 | ) | 228 | ||||
| Euro | (97 | ) | (15 | ) | – | – | (46 | ) | (158 | ) | ||
| Japanese Yen | 29 | – | 1 | – | 1 | 31 | ||||||
| Other | 39 | (8 | ) | (4 | ) | – | – | 27 | ||||
| 205 | (18 | ) | (38 | ) | (1 | ) | (198 | ) | (50 | ) | ||
| Functional currency of Group operation | ||||||||||||
| At 31st December 2003 | ||||||||||||
Net monetary assets/(liabilities) held in non-functional currency | Sterling £m | US$ £m | Euro £m | Yen £m | Other £m | Total £m | ||||||
| Sterling | – | 157 | (30 | ) | – | 242 | 369 | |||||
| US dollars | 41 | – | 12 | – | 45 | 98 | ||||||
| Euro | (55 | ) | 111 | – | – | 6 | 62 | |||||
| Japanese Yen | 7 | (1 | ) | – | – | – | 6 | |||||
| Other | (145 | ) | (55 | ) | (12 | ) | – | – | (212 | ) | ||
| (152 | ) | 212 | (30 | ) | – | 293 | 323 | |||||
Maturity of financial liabilities | Debt £m | Finance leases £m | Other £m | Total 2004 £m | Total 2003 £m | |||||||
| Within one year or on demand | 1,547 | 35 | 53 | 1,635 | 2,032 | |||||||
| Between one and two years | 262 | 27 | 88 | 377 | 630 | |||||||
| Between two and five years | 1,817 | 24 | 132 | 1,973 | 1,597 | |||||||
| After five years | 2,244 | 7 | 227 | 2,478 | 1,824 | |||||||
| 5,870 | 93 | 500 | 6,463 | 6,083 | ||||||||
2004 | ||||||||||||
| Hedges | Gains £m | Losses £m | Net £m | |||||||||
| Unrecognised gains and losses at the beginning of the year | 171 | (60 | ) | 111 | ||||||||
| Unrecognised gains and losses arising in previous years and recognised in the year | (27 | ) | – | (27 | ) | |||||||
| Unrecognised gains and losses arising in the year | 8 | (77 | ) | (69 | ) | |||||||
| Total unrecognised gains and losses at the end of the year | 152 | (137 | ) | 15 | ||||||||
| Expected to be recognised within one year | – | (9 | ) | (9 | ) | |||||||
| Expected to be recognised after one year | 152 | (128 | ) | 24 | ||||||||
| Total unrecognised gains and losses at the end of the year | 152 | (137 | ) | 15 | ||||||||
The unrecognised gains and losses above represent the difference between the carrying amount and the fair valueother reserves. At 31st December 2007, GSK held Treasury shares at a cost of the currency swaps, interest rate swaps, equity collar and other foreign exchange derivatives.£6,683 million (2006 – £3,147 million) which has been deducted from retained earnings.
Committed facilities
The Group has committed facilities to back up the commercial paper programme of $5 billion (£2.5 billion) (2006 – $900 million (£469 million) (2003 – $1,404 million (£784459 million)) of 364 days duration, renewable annually. At 31st December 2004,2007, undrawn committed facilities totalled $5 billion (£2.5 billion) (2006 – $900 million (£469 million) (2003 – $1,404 million (£784459 million)).
| 35 Employee costs | 2004 £m | 2003 (restated) £m | 2002 (restated) £m | |||
| Wages and salaries | 3,864 | 3,999 | 3,876 | |||
| Social security costs | 430 | 444 | 385 | |||
| Pension and other post-retirement costs | 295 | 386 | 257 | |||
| Cost of share-based incentive plans | 24 | (20 | ) | 117 | ||
| Severance costs arising from integration and restructuring activities | 80 | 222 | 228 | |||
| Pension and other post-retirement costs arising from integration and restructuring activities | 6 | 43 | 59 | |||
| 4,699 | 5,074 | 4,922 | ||||
The Group provides benefits to employees, commensurate with local practice in individual countries, including, in some markets, healthcare insurance, subsidised car schemes and personal life assurance.
Information on Directors’ remuneration is given in the Remuneration Report on pages 43 to 58.
| The average number of persons employed by the Group (including Directors) during the year | 2004 Number | 2003 Number | 2002 Number | |||
| Manufacturing | 31,427 | 34,265 | 36,548 | |||
| Selling, general and administration | 53,513 | 54,128 | 54,810 | |||
| Research and development | 14,897 | 14,773 | 14,808 | |||
| 99,837 | 103,166 | 106,166 | ||||
| The average number of Group employees excludes temporary and contract staff. | ||||||
| The numbers of Group employees at the end of each financial year are given in the Financial record (page 162). | ||||||
| Pension and other post-retirement costs | 2004 £m | 2003 £m | 2002 £m | |||
| UK pension schemes | 96 | 113 | 18 | |||
| US pension schemes | 28 | 75 | 86 | |||
| Other overseas pensions schemes | 69 | 74 | 52 | |||
| Unfunded post-retirement healthcare schemes | 84 | 100 | 61 | |||
| Post-employment costs | 18 | 24 | 40 | |||
| 295 | 386 | 257 | ||||
| Analysed as: | ||||||
| Funded defined benefit/hybrid schemes | 148 | 213 | 92 | |||
| Unfunded defined benefit schemes | 22 | 24 | 34 | |||
| Defined contribution schemes | 23 | 25 | 30 | |||
| Unfunded post-retirement healthcare schemes | 84 | 100 | 61 | |||
| Post-employment costs | 18 | 24 | 40 | |||
| 295 | 386 | 257 | ||||
| Pension and other post-retirement costs arising from integration and restructuring | 6 | 43 | 59 | |||
PensionsGroup undertakings operate pension arrangements which cover the Group’s material obligations to provide pensions to retired employees. These arrangements have been developed in accordance with local practices in the countries concerned. Pension benefits can be provided by state schemes; by defined contribution schemes, whereby retirement benefits are determined by the value of funds arising from contributions paid in respect of each employee, or by defined benefit schemes, whereby retirement benefits are based on employee pensionable remuneration and length of service. Some defined benefit schemes now also include defined contribution sections and are described as ‘hybrid’ schemes in the table.
In the majority of cases the contributions to defined benefit schemes are determined in accordance with the advice of independent, professionally qualified actuaries. Formal, independent, actuarial valuations of the Group’s main plans are undertaken regularly, normally at least every three years. The assets of funded schemes are generally held in separately administered trusts or are insured. Assets are invested in different classes in order to maintain a balance between risk and return. Investments are diversified to limit the financial effect of the failure of any individual investment.
35Employee costs continued
Pension costs of defined benefit schemes for accounting purposes have been assessed in accordance with independent actuarial advice, generally using the projected unit method and by spreading surpluses or deficits over the average expected remaining service lives of the respective memberships. In certain countries pension benefits are provided on an unfunded basis, some administered by trustee companies. Where assets are not held with the specific purpose of matching the liabilities of unfunded schemes, a provision is included within provisions for pensions and other post-retirement benefits. Liabilities are generally assessed annually in accordance with the advice of independent actuaries.
The market value of the assets of the Group’s funded defined benefit pension funds at the dates of the latest actuarial valuations, some of which date back to 2001, was £5.1 billion and the actuarial value of assets was sufficient to cover approximately 97 per cent of the benefits that had accrued to members after allowing for future salary and pension increases. The UK defined benefit pension schemes account for approximately 60 per cent of the Group’s plans in asset valuation and projected benefit terms and the US defined benefit pension schemes account for approximately 30 per cent of the Group’s plans in asset valuation and projected benefit terms.
During 2004, the Group made special funding contributions to the UK and US pension schemes totalling £256 million. The Group has agreed with the trustees of certain of the pension schemes to make additional contributions dependent on the funding status of those schemes. In 2005, following the move to IFRS, pension costs for the Group are expected to be approximately £35 million higher than they were in 2004.
UKIn the UK the defined benefit pension schemes operated for the benefit of former Glaxo Wellcome employees and former SmithKline Beecham employees remain separate. These schemes were closed to new entrants in 2001 and subsequent UK employees are entitled to join a defined contribution scheme. The relevant assumptions used in calculating the pension costs of all of the UK defined benefit schemes for accounting purposes are as follows:
| 2004 | 2003 | |||
| % pa | % pa | |||
| Rate of increase of future earnings | 3.75 | 3.75 | ||
| Discount rate | 7.75 | 7.75 | ||
| Expected long-term rate of return on investments | 7.75 | 7.75 | ||
| Expected pension increases | 2.25 | 2.25 | ||
The regular cost for the Glaxo Wellcome pension arrangements in 2004 was £57million, which reduced to an accounting cost of £47million, after allowance was made for spreading the surplus disclosed as a level percentage of salary over the expected future working lifetime of the existing members (some 9 years). The most recent triennial actuarial valuations for funding purposes were carried out as at 31st December 2002. At that date the assets of the schemes represented 92 per cent of the actuarial value of all benefits accrued to members after allowing for future salary and pension increases. The market value of the assets held by the schemes at 31st December 2002 was £2,103 million.
The regular cost for the SmithKline Beecham schemes in 2004 was £15 million, which increased to an accounting cost of £49 million after allowance was made for the spreading of the deficit over the expected future working lifetime of current employees in the scheme (some 10 years). The latest valuation was carried out at 31st December 2002 and at that date the scheme assets represented 56 per cent of the actuarial value of the accrued service liabilities based on the 2003 assumptions. The market value of assets held by the scheme at 31st December 2002 was £856 million.
USAIn the USA the former Glaxo Wellcome and SmithKline Beecham defined benefit and hybrid schemes were merged during 2001. The relevant assumptions used in calculating the pension costs for accounting purposes are as follows:
| 2004 | 2003 | |||
| % pa | % pa | |||
| Rate of increase of future earnings | 5.50 | 5.50 | ||
| Discount rate | 7.75 | 8.50 | ||
| Expected long-term rate of return on investments | 7.75 | 8.50 | ||
| Cash balance credit/conversion rate | 5.25 | 5.75 | ||
The regular cost for the main US schemes in 2004 was £51 million, which decreased to an accounting cost of £28 million after allowance was made for the spreading of the surplus over the expected future working lifetime of current employees in the schemes. The latest valuation was carried out at 1st January 2004 and at that date the actuarial value of scheme assets represented 110 per cent of the actuarial value of the accrued service liabilities. The market value of assets held by the scheme at 1st January 2004 was £1,593 million.
Post-retirement healthcareThe Group operates a number of post-retirement healthcare schemes, the principal one of which is in the USA. The cost of the US scheme has been assessed using the same assumptions as for the US pension scheme, together with the assumption for future medical inflation of 10 per cent reducing by one per cent per year to five per cent. The total provision for post-retirement benefits at 31st December 2004 amounted to £594 million (2003 – £569 million).
35Employee costs continued
FRS 17 disclosuresThe Group continues to account for pension arrangements in accordance with SSAP 24 ‘Accounting for Pension Costs’. Under the transitional provisions of FRS 17 ‘Retirement Benefits’ certain disclosures are required on the basis of the valuation methodology adopted by FRS 17. For defined benefit schemes the fair values of pension scheme assets at 31st December 2004 are compared with the future pension liabilities calculated under the projected unit method applying the following assumptions:
| UK | USA | Rest of World | ||||||||||||||||
| 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | ||||||||||
| % pa | % pa | % pa | % pa | % pa | % pa | % pa | % pa | % pa | ||||||||||
| Rate of increase of future earnings | 4.00 | 4.00 | 3.75 | 5.00 | 5.50 | 5.50 | 3.25 | 3.00 | 3.00 | |||||||||
| Discount rate | 5.25 | 5.25 | 5.75 | 5.75 | 6.25 | 6.75 | 4.25 | 4.75 | 4.75 | |||||||||
| Expected pension increases | 2.50 | 2.50 | 2.25 | n/a | n/a | n/a | 2.00 | 2.00 | 1.50 | |||||||||
| Cash balance credit/conversion rate | n/a | n/a | n/a | 4.75 | 5.25 | 5.75 | 1.75 | 1.50 | n/a | |||||||||
| Inflation rate | 2.50 | 2.50 | 2.25 | 2.50 | 2.50 | 2.25 | 1.75 | 1.50 | 1.50 | |||||||||
The expected long-term rates of return on the assets determined based on actuarial advice and the fair values of the assets and liabilities of the UK and US defined benefit schemes, together with aggregated data for other defined benefit schemes in the Group are as follows:
| UK | USA | Rest of World | Group | |||||||||||
| Average | ||||||||||||||
| At 31st December 2004 | Expected rate | Fair | Expected rate | Fair | expected rate | Fair | Fair | |||||||
| of return | value | of return | value | of return | value | value | ||||||||
| % | £m | % | £m | % | £m | £m | ||||||||
| Equities | 8.25 | 2,716 | 8.50 | 1,229 | 7.50 | 205 | 4,150 | |||||||
| Property | – | – | 6.50 | 58 | 6.25 | 7 | 65 | |||||||
| Bonds | 4.50 | 1,404 | 5.75 | 307 | 3.75 | 270 | 1,981 | |||||||
| Other assets | 4.00 | 44 | 2.50 | 50 | 2.25 | 62 | 156 | |||||||
| Fair value of assets | 4,164 | 1,644 | 544 | 6,352 | ||||||||||
| Present value of scheme liabilities | (5,326 | ) | (1,750 | ) | (760 | ) | (7,836 | ) | ||||||
| (1,162 | ) | (106 | ) | (216 | ) | (1,484 | ) | |||||||
| Value of schemes in surplus | 18 | 7 | 25 | |||||||||||
| Deferred tax liability | (7 | ) | (2 | ) | (9 | ) | ||||||||
| 11 | 5 | 16 | ||||||||||||
| Value of schemes in deficit | (1,162 | ) | (124 | ) | (223 | ) | (1,509 | ) | ||||||
| Deferred tax asset | 349 | 46 | 78 | 473 | ||||||||||
| (813 | ) | (78 | ) | (145 | ) | (1,036 | ) | |||||||
| Group total | (1,020 | ) | ||||||||||||
| UK | USA | Rest of World | Group | |||||||||||
| Average | ||||||||||||||
| At 31st December 2003 | Expected rate | Fair | Expected rate | Fair | expected rate | Fair | Fair | |||||||
| of return | value | of return | value | of return | value | value | ||||||||
| % | £m | % | £m | % | £m | £m | ||||||||
| Equities | 8.25 | 2,927 | 8.50 | 1,201 | 7.75 | 174 | 4,302 | |||||||
| Property | – | – | 6.50 | 52 | 6.50 | 6 | 58 | |||||||
| Bonds | 4.50 | 574 | 5.75 | 314 | 4.00 | 226 | 1,114 | |||||||
| Other assets | 4.00 | 185 | 1.00 | 26 | 2.00 | 18 | 229 | |||||||
| Fair value of assets | 3,686 | 1,593 | 424 | 5,703 | ||||||||||
| Present value of scheme liabilities | (5,181 | ) | (1,743 | ) | (674 | ) | (7,598 | ) | ||||||
| (1,495 | ) | (150 | ) | (250 | ) | (1,895 | ) | |||||||
| Value of schemes in surplus | 7 | 7 | ||||||||||||
| Deferred tax liability | (2 | ) | (2 | ) | ||||||||||
| 5 | 5 | |||||||||||||
| Value of schemes in deficit | (1,495 | ) | (150 | ) | (257 | ) | (1,902 | ) | ||||||
| Deferred tax asset | 449 | 53 | 95 | 597 | ||||||||||
| (1,046 | ) | (97 | ) | (162 | ) | (1,305 | ) | |||||||
| Group total | (1,300 | ) | ||||||||||||
35 Employee costs continued
| UK | USA | Rest of World | Group | |||||||||||
| Average | ||||||||||||||
| At 31st December 2002 | Expected rate | Fair | Expected rate | Fair | expected rate | Fair | Fair | |||||||
| of return | value | of return | value | of return | value | value | ||||||||
| % | £m | % | £m | % | £m | £m | ||||||||
| Equities | 8.25 | 2,523 | 9.25 | 804 | 6.75 | 172 | 3,499 | |||||||
| Property | – | – | 7.00 | 53 | 7.00 | 5 | 58 | |||||||
| Bonds | 4.50 | 299 | 6.25 | 265 | 4.50 | 145 | 709 | |||||||
| Other assets | 4.00 | 137 | 1.50 | 240 | 1.75 | 9 | 386 | |||||||
| Fair value of assets | 2,959 | 1,362 | 331 | 4,652 | ||||||||||
| Present value of scheme liabilities | (4,153 | ) | (1,782 | ) | (578 | ) | (6,513 | ) | ||||||
| (1,194 | ) | (420 | ) | (247 | ) | (1,861 | ) | |||||||
| Value of schemes in surplus | 11 | 11 | ||||||||||||
| Deferred tax liability | (3 | ) | (3 | ) | ||||||||||
| 8 | 8 | |||||||||||||
| Value of schemes in deficit | (1,194 | ) | (420 | ) | (258 | ) | (1,872 | ) | ||||||
| Deferred tax asset | 358 | 147 | 97 | 602 | ||||||||||
| (836 | ) | (273 | ) | (161 | ) | (1,270 | ) | |||||||
| Group total | (1,262 | ) | ||||||||||||
The UK defined benefit schemes also have defined contribution sections with account balances totalling £404 million at 31st December 2004 (2003 – £327 million, 2002 – £281 million). The defined benefit sections of the UK schemes have been closed to new members and, under the projected unit method of valuing the pension scheme liabilities, the current service cost will increase as a percentage of payroll as the members of the schemes approach retirement. The deficits under FRS 17 reflect the different basis for valuing liabilities compared with SSAP 24.
The liability under FRS 17 for the US post-retirement healthcare scheme has been assessed using the same assumptions as for the US pension scheme, together with the assumption for future medical inflation of 9 per cent, reducing by one per cent per year to five per cent. On this basis the liability for the US scheme has been assessed at £895 million (2003 – £908 million; 2002 – £766 million), which reduced to £564 million (2003 – £590 million; 2002 – £475 million) after taking account of deferred tax.
If the defined benefit pension and post-retirement benefit schemes had been accounted for under FRS 17, the following amounts would have been recorded in the profit and loss account and statement of total recognised gains and losses for the three years ended 31st December 2004.
| Post-retirement | ||||||||||
| Pensions | benefits | |||||||||
| 2004 | UK | USA | Rest of World | Group | Group | |||||
| £m | £m | £m | £m | £m | ||||||
| Amounts charged to operating profit | ||||||||||
| Current service cost | (117 | ) | (58 | ) | (42 | ) | (217 | ) | (37 | ) |
| Past service cost | (3 | ) | – | (2 | ) | (5 | ) | – | ||
| Curtailments/settlements | (5 | ) | – | – | (5 | ) | – | |||
| (125 | ) | (58 | ) | (44 | ) | (227 | ) | (37 | ) | |
| Amounts credited/(charged) to net interest | ||||||||||
| Expected return on pension scheme assets | 274 | 118 | 20 | 412 | ||||||
| Interest on scheme liabilities | (269 | ) | (104 | ) | (27 | ) | (400 | ) | (55 | ) |
| 5 | 14 | (7 | ) | 12 | (55 | ) | ||||
| Amounts recorded in statement of total | ||||||||||
| recognised gains and losses | ||||||||||
| Actual return less expected return on pension scheme assets | 106 | 82 | 1 | 189 | ||||||
| Experience gains/(losses) arising on scheme liabilities | 11 | (6 | ) | 43 | 48 | 47 | ||||
| Changes in assumptions relating to present | ||||||||||
| value of scheme liabilities | – | (62 | ) | (31 | ) | (93 | ) | (82 | ) | |
| 117 | 14 | 13 | 144 | (35 | ) | |||||
35Employee costs continued
35 Employee costs continued
| Post-retirement | ||||||||||
| Pensions | benefits | |||||||||
| Movements in deficits | UK | USA | Rest of World | Group | Group | |||||
| £m | £m | £m | £m | £m | ||||||
| Deficits in schemes at 1st January 2002 | (255 | ) | (245 | ) | (214 | ) | (714 | ) | (854 | ) |
| Exchange adjustments | – | 37 | (9 | ) | 28 | 85 | ||||
| Charged to operating profit | (146 | ) | (108 | ) | (33 | ) | (287 | ) | (24 | ) |
| Employer contributions | 154 | 249 | 61 | 464 | 41 | |||||
| Other finance income/(expense) | 58 | – | (8 | ) | 50 | (53 | ) | |||
| Actuarial losses recognised in statement of total | ||||||||||
| recognised gains and losses | (1,005 | ) | (353 | ) | (44 | ) | (1,402 | ) | (29 | ) |
| Deficits in schemes at 31st December 2002 | (1,194 | ) | (420 | ) | (247 | ) | (1,861 | ) | (834 | ) |
| Exchange adjustments | – | 20 | (15 | ) | 5 | 96 | ||||
| Charged to operating profit | (186 | ) | (75 | ) | (28 | ) | (289 | ) | (26 | ) |
| Employer contributions | 341 | 159 | 98 | 598 | 41 | |||||
| Other finance income/(expense) | (15 | ) | (8 | ) | (8 | ) | (31 | ) | (64 | ) |
| Actuarial (losses)/gains recognised in statement of total | ||||||||||
| recognised gains and losses | (441 | ) | 174 | (50 | ) | (317 | ) | (190 | ) | |
| Deficits in schemes at 31st December 2003 | (1,495 | ) | (150 | ) | (250 | ) | (1,895 | ) | (977 | ) |
| Exchange adjustments | – | 9 | 4 | 13 | 59 | |||||
| Charged to operating profit | (125 | ) | (58 | ) | (44 | ) | (227 | ) | (37 | ) |
| Employer contributions | 336 | 65 | 68 | 469 | 40 | |||||
| Other finance income/(expense) | 5 | 14 | (7 | ) | 12 | (55 | ) | |||
| Actuarial (losses)/gains recognised in statement of total | ||||||||||
| recognised gains and losses | 117 | 14 | 13 | 144 | (35 | ) | ||||
| Deficits in schemes at 31st December 2004 | (1,162 | ) | (106 | ) | (216 | ) | (1,484 | ) | (1,005 | ) |
| Post-retirement | ||||||||||
| Pensions | benefits | |||||||||
| History of experience gains and losses | UK | USA | Rest of World | Group | Group | |||||
| £m | £m | £m | £m | £m | ||||||
| 2004 | ||||||||||
| Difference between the expected and actual | ||||||||||
| return on scheme assets (£m) | 106 | 82 | 1 | 189 | ||||||
| Percentage of scheme assets at 31st December 2004 | 3% | 5% | – | 3% | ||||||
| Experience gains/(losses) of scheme liabilities (£m) | 11 | (6 | ) | 43 | 48 | 47 | ||||
| Percentage of present value of scheme liabilities | ||||||||||
| at 31st December 2004 | – | – | 6% | 1% | 5% | |||||
| Total amount recognised in statement of total | ||||||||||
| recognised gains and losses (£m) | 117 | 14 | 13 | 144 | (35 | ) | ||||
| Percentage of present value of scheme | ||||||||||
| liabilities at 31st December 2004 | 2% | 1% | 2% | 2% | 3% | |||||
| FINANCIALSTATEMENTS | |
| Notes to the financial statements |
35 Employee costs continued
| Post-retirement | ||||||||||
| Pensions | benefits | |||||||||
| History of experience gains and losses | ||||||||||
| UK | USA | Rest of World | Group | Group | ||||||
| £m | £m | £m | £m | £m | ||||||
| 2003 | ||||||||||
| Difference between the expected and actual | ||||||||||
| return on scheme assets (£m) | 368 | 230 | 10 | 608 | ||||||
| Percentage of scheme assets at 31st December 2003 | 10% | 14% | 2% | 11% | ||||||
| Experience (losses)/gains of scheme liabilities (£m) | (193 | ) | 5 | (28 | ) | (216 | ) | (123 | ) | |
| Percentage of present value of scheme liabilities | ||||||||||
| at 31st December 2003 | 4% | – | 4% | 3% | 13% | |||||
| Total amount recognised in statement of total | ||||||||||
| recognised gains and losses (£m) | (441 | ) | 174 | (50 | ) | (317 | ) | (190 | ) | |
| Percentage of present value of scheme | ||||||||||
| liabilities at 31st December 2003 | 9% | 10% | 7% | 4% | 19% | |||||
| 2002 | ||||||||||
| Difference between the expected and actual | ||||||||||
| return on scheme assets (£m) | (1,024 | ) | (293 | ) | (56 | ) | (1,373 | ) | ||
| Percentage of scheme assets at 31st December 2002 | 35% | 22% | 17% | 30% | ||||||
| Experience gains/(losses) of scheme liabilities (£m) | 34 | (3 | ) | 2 | 33 | 95 | ||||
| Percentage of present value of scheme liabilities | ||||||||||
| at 31st December 2002 | 1% | – | – | 1% | 11% | |||||
| Total amount recognised in statement of total | ||||||||||
| recognised gains and losses (£m) | (1,005 | ) | (353 | ) | (44 | ) | (1,402 | ) | (29 | ) |
| Percentage of present value of scheme | ||||||||||
| liabilities at 31st December 2002 | 24% | 20% | 8% | 22% | 3% | |||||
If the FRS 17 valuation basis had been applied in the financial statements instead of the SSAP 24 valuation basis, the effect on the profit and loss account reserve after taking account of deferred tax would have been as follows:
| 2003 | ||||||||
| 2004 | (restated) | |||||||
| £m | £m | £m | £m | |||||
| Profit and loss account reserve per balance sheet | 4,781 | 4,112 | ||||||
| Pension liability under FRS 17 | (1,020 | ) | (1,300 | ) | ||||
| Net pension asset under SSAP 24 per balance sheet | 387 | 152 | ||||||
| (1,407 | ) | (1,452 | ) | |||||
| Post-retirement healthcare schemes under FRS 17 | (640 | ) | (638 | ) | ||||
| Net post-retirement healthcare schemes provision per balance sheet | (379 | ) | (372 | ) | ||||
| (261 | ) | (266 | ) | |||||
| Profit and loss account reserve including FRS 17 pension and post-retirement healthcare liability | 3,113 | 2,394 | ||||||
| Notes to the financial statements | |
| continued | |
3641 Financial instruments and related disclosurescontinued
| 2007 | 2006 | |||||||||
| Carrying | Fair | Carrying | Fair | |||||||
| value | value | value | value | |||||||
| £m | £m | £m | £m | |||||||
| Cash and cash equivalents | 3,379 | 3,379 | 2,005 | 2,005 | ||||||
| Available-for-sale investments: | ||||||||||
| Liquid investments: | ||||||||||
| – | redeemable shares | 736 | 736 | 676 | 676 | |||||
| – | government bonds | 205 | 205 | 197 | 197 | |||||
| – | other | 212 | 212 | 162 | 162 | |||||
| Total liquid investments | 1,153 | 1,153 | 1,035 | 1,035 | ||||||
| Other investments | 517 | 517 | 441 | 441 | ||||||
| Loans and receivables: | ||||||||||
| Trade and other receivables and Other non-current assets in scope of IAS 39 | 5,317 | 5,317 | 4,776 | 4,776 | ||||||
| Held-for-trading financial assets: | ||||||||||
| Derivatives designated as accounting hedges | 175 | 175 | 167 | 167 | ||||||
| Other derivatives | 301 | 301 | 26 | 26 | ||||||
| Total financial assets | 10,842 | 10,842 | 8,450 | 8,450 | ||||||
| Financial liabilities measured at amortised cost: | ||||||||||
| Borrowings: | ||||||||||
| – | bonds in a designated hedging relationship | (5,452 | ) | (5,433 | ) | (2,980 | ) | (2,951 | ) | |
| – | other bonds | (2,753 | ) | (2,599 | ) | (1,727 | ) | (1,768 | ) | |
| – | commercial paper | (2,064 | ) | (2,064 | ) | – | – | |||
| – | bank loans and overdrafts | (171 | ) | (171 | ) | (421 | ) | (421 | ) | |
| – | other loans and private financing | (8 | ) | (8 | ) | (223 | ) | (233 | ) | |
| – | obligations under finance leases | (123 | ) | (123 | ) | (139 | ) | (139 | ) | |
| Total borrowings | (10,571 | ) | (10,398 | ) | (5,490 | ) | (5,512 | ) | ||
| Trade and other payables and Other non-currentliabilities in scope of IAS 39 | (4,450 | ) | (4,450 | ) | (4,609 | ) | (4,609 | ) | ||
| Held-for-trading financial liabilities: | ||||||||||
| Derivatives designated as accounting hedges | (226 | ) | (226 | ) | (51 | ) | (51 | ) | ||
| Other derivatives | (44 | ) | (44 | ) | (49 | ) | (49 | ) | ||
| Total financial liabilities | (15,291 | ) | (15,118 | ) | (10,199 | ) | (10,221 | ) | ||
| Net financial assets and financial liabilities | (4,449 | ) | (4,276 | ) | (1,749 | ) | (1,771 | ) | ||
| GSK Annual Report 2007 | 139 |
| FINANCIALSTATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
41 Financial instruments and related disclosurescontinued
Trade and other receivables and Other non-current assets in scope of IAS 39
The following table reconciles Trade and other receivables and Other non-current assets which fall within the scope of IAS 39 to the relevant balance sheet amounts. Other assets include tax receivables, pension surplus balances and prepayments, which are outside the scope of IAS 39. The financial assets are predominantly non-interest earning.
| 2007 | 2006 | |||
| £m | £m | |||
| Trade and other receivables (Note 24) | 5,495 | 5,237 | ||
| Other non-current assets (Note 22) | 687 | 608 | ||
| 6,182 | 5,845 | |||
| Analysed as: | ||||
| Financial assets in scope of IAS 39 | 5,317 | 4,776 | ||
| Other assets | 865 | 1,069 | ||
| 6,182 | 5,845 | |||
The following table shows the age of such financial assets which are past due and for which no provision for bad or doubtful debts has been raised:
| 2007 | 2006 | |||
| £m | £m | |||
| Past due by 1–30 days | 288 | 156 | ||
| Past due by 31–90 days | 101 | 132 | ||
| Past due by 91–180 days | 97 | 103 | ||
| Past due by 181–365 days | 108 | 92 | ||
| Past due by more than 365 days | 214 | 132 | ||
| 808 | 615 | |||
Amounts past due by greater than 90 days total £419 million (2006 – £327 million). Of this balance £315 million (2006 – £213 million) relates to receivables due from state hospital authorities in certain European countries. The Group has not raised bad or doubtful debt provisions against these amounts as they are considered to be recoverable.
Trade and other payables and Other non-current liabilities in scope of IAS 39
The following table reconciles Trade and other payables and Other non-current liabilities which fall within the scope of IAS 39 to the relevant balance sheet amounts. Other liabilities include payments on account and tax and social security payables, which are outside the scope of IAS 39. The financial liabilities are predominantly non-interest bearing.
| 2007 | 2006 | |||
| £m | £m | |||
| Trade and other payables (Note 27) | (4,861 | ) | (4,831 | ) |
| Other non-current liabilities (Note 30) | (368 | ) | (346 | ) |
| (5,229 | ) | (5,177 | ) | |
| Analysed as: | ||||
| Financial liabilities in scope of IAS 39 | (4,450 | ) | (4,609 | ) |
| Other liabilities | (779 | ) | (568 | ) |
| (5,229 | ) | (5,177 | ) | |
| 140 | GSK Annual Report 2007 |
| FINANCIAL STATEMENTS | |
| Notes to the financialstatements | |
| Notes to the financial statements | |
| continued | |
41 Financial instruments and related disclosurescontinued
Debt interest rate repricing table
The following table sets out the exposure of the Group to interest rates on debt before and after the effect of interest rate swaps. The maturity analysis of fixed rate debt is stated by contractual maturity and of floating rate debt by interest rate repricing dates. For the purpose of this table, debt is defined as all classes of borrowings other than obligations under finance leases.
| 2007 | 2006 | |||||||||||
| Effect of | Effect of | |||||||||||
| interest | interest | |||||||||||
| Debt | rate swaps | Total | Debt | rate swaps | Total | |||||||
| £m | £m | £m | £m | £m | £m | |||||||
| Floating and fixed rate debt less than one year | (3,455 | ) | (746 | ) | (4,201 | ) | (895 | ) | (1,883 | ) | (2,778 | ) |
| Between one and two years | (369 | ) | – | (369 | ) | (1,166 | ) | 1,164 | (2 | ) | ||
| Between two and three years | (1 | ) | – | (1 | ) | (339 | ) | – | (339 | ) | ||
| Between three and four years | (1 | ) | – | (1 | ) | (1 | ) | – | (1 | ) | ||
| Between four and five years | (2,194 | ) | – | (2,194 | ) | – | – | – | ||||
| Greater than five years | (4,409 | ) | 746 | (3,663 | ) | (2,948 | ) | 719 | (2,229 | ) | ||
| Total | (10,429 | ) | – | (10,429 | ) | (5,349 | ) | – | (5,349 | ) | ||
| Original issuance profile: | ||||||||||||
| Fixed rate interest | (8,204 | ) | 1,979 | (6,225 | ) | (4,721 | ) | 2,138 | (2,583 | ) | ||
| Floating rate interest | (2,225 | ) | (1,979 | ) | (4,204 | ) | (628 | ) | (2,138 | ) | (2,766 | ) |
| Total interest bearing | (10,429 | ) | – | (10,429 | ) | (5,349 | ) | – | (5,349 | ) | ||
| Non-interest bearing | (19 | ) | – | (19 | ) | (2 | ) | – | (2 | ) | ||
| (10,448 | ) | – | (10,448 | ) | (5,351 | ) | – | (5,351 | ) | |||
Sensitivity analysis
The sensitivity analysis has been prepared on the assumption that the amount of net debt, the ratio of fixed to floating interest rates of the debt and derivatives portfolio and the proportion of financial instruments in foreign currencies are all constant and on the basis of the hedge designations in place at 31st December.
Financial instruments affected by market risk include borrowings, deposits and derivative financial instruments. The following analyses are intended to illustrate the sensitivity of such financial instruments to changes in relevant foreign exchange and interest rates.
Foreign exchange sensitivity
The table below shows the Group’s sensitivity to foreign exchange rates on its US dollar, Euro and Yen financial instruments excluding trade payables, trade receivables, other non-derivative financial instruments not in net debt and obligations under finance leases, which do not present a material exposure. These three currencies are the major currencies in which GSK’s financial instruments are denominated. GSK has considered movements in these currencies over the last two years and has concluded that a 10% movement in rates is a reasonable benchmark. In this table, financial instruments are only considered sensitive to foreign exchange rates where they are not in the functional currency of the entity that holds them. Intercompany loans which are fully hedged to maturity with a currency swap have been excluded from this analysis.
| 2007 | 2006 | |||||||
| Increase | Reduction | Increase | Reduction | |||||
| in income | in equity | in income | in equity | |||||
| £m | £m | £m | £m | |||||
| 10% appreciation of the US dollar | 38 | 580 | 35 | 195 | ||||
| 10% appreciation of the Euro | 1 | 709 | – | 436 | ||||
| 10% appreciation of the Yen | – | 15 | – | 14 | ||||
A 10% depreciation of the stated currencies would have an equal and opposite effect.
The movements in the income statement relate primarily to the hedging instrument for a US dollar legal provision. Whilst this is an economic hedge, the provision is not a financial instrument and therefore is not included in the table above.
The movements in equity relate to foreign exchange positions used to hedge Group assets denominated in US dollar, Euro and Yen. Therefore, a depreciation on the currency swap would give rise to a corresponding appreciation on the Group asset. Foreign exchange sensitivity on Group assets other than financial instruments is not included above.
| GSK Annual Report 2007 | 141 |
| FINANCIAL STATEMENTS | |
| Notes to the financialstatements | |
| Notes to the financial statements | |
| continued | |
41 Financial instruments and related disclosurescontinued
Interest rate sensitivity
The table below shows the Group’s sensitivity to interest rates on its floating rate Sterling, US dollar and Euro financial instruments, being the currencies in which GSK has historically issued debt and held investments. GSK has considered movements in these interest rates over the last two years and has concluded that a 1% increase is a reasonable benchmark. Debt with a maturity of less than one year is floating rate for this calculation. A 1% movement in interest rates is not deemed to have a material effect on equity.
| 2007 | 2006 | |||
| Increase/(decrease) | Increase/(decrease) | |||
| in income | in income | |||
| £m | £m | |||
| 1% increase in Sterling interest rates | 1 | 3 | ||
| 1% increase in US dollar interest rates | (16 | ) | (8 | ) |
| 1% increase in Euro interest rates | 3 | 2 | ||
A 1% decrease in these interest rates would have an equal and opposite effect. Interest rate movements on obligations under finance leases, foreign currency and interest rate derivatives, trade payables, trade receivables and other financial instruments not in net debt do not present a material exposure to the Group’s balance sheet based on a 1% increase or decrease in these interest rates.
Contractual cash flows for non-derivative financial liabilities and derivative instruments
The following is an analysis of the anticipated contractual cash flows including interest payable for the Group’s non-derivative financial liabilities on an undiscounted basis. For the purpose of this table, debt is defined as all classes of borrowings except for obligations under finance leases. Interest is calculated based on debt held at 31st December without taking account of future issuance. Floating rate interest is estimated using the prevailing interest rate at the balance sheet date. Cash flows in foreign currencies are translated using spot rates at 31st December.
| Finance charge | Trade and | |||||||||||
| Obligations | on obligations | other | ||||||||||
| Interest on | under finance | under finance | payables not | |||||||||
| Debt | debt | leases | leases | in net debt | Total | |||||||
| At 31st December 2007 | £m | £m | £m | £m | £m | £m | ||||||
| Due less than one year | (3,466 | ) | (412 | ) | (40 | ) | (5 | ) | (4,330 | ) | (8,253 | ) |
| Between one and two years | (368 | ) | (339 | ) | (37 | ) | (3 | ) | (75 | ) | (822 | ) |
| Between two and three years | (10 | ) | (327 | ) | (24 | ) | (2 | ) | (15 | ) | (378 | ) |
| Between three and four years | – | (327 | ) | (9 | ) | (2 | ) | (3 | ) | (341 | ) | |
| Between four and five years | (2,206 | ) | (327 | ) | (4 | ) | (1 | ) | (1 | ) | (2,539 | ) |
| Greater than five years | (4,478 | ) | (3,563 | ) | (9 | ) | (1 | ) | (26 | ) | (8,077 | ) |
| Gross contractual cash flows | (10,528 | ) | (5,295 | ) | (123 | ) | (14 | ) | (4,450 | ) | (20,410 | ) |
| Finance charge | Trade | |||||||||||
| Obligations | on obligations | and other | ||||||||||
| Interest on | under finance | under finance | payables not | |||||||||
| Debt | debt | leases | leases | in net debt | Total | |||||||
| At 31st December 2006 | £m | £m | £m | £m | £m | £m | ||||||
| Due less than one year | (677 | ) | (209 | ) | (42 | ) | (7 | ) | (4,534 | ) | (5,469 | ) |
| Between one and two years | (1,179 | ) | (205 | ) | (36 | ) | (5 | ) | (55 | ) | (1,480 | ) |
| Between two and three years | (339 | ) | (158 | ) | (27 | ) | (3 | ) | (15 | ) | (542 | ) |
| Between three and four years | (11 | ) | (147 | ) | (15 | ) | (3 | ) | (2 | ) | (178 | ) |
| Between four and five years | – | (147 | ) | (7 | ) | (1 | ) | – | (155 | ) | ||
| Greater than five years | (3,242 | ) | (2,082 | ) | (12 | ) | (2 | ) | (3 | ) | (5,341 | ) |
| Gross contractual cash flows | (5,448 | ) | (2,948 | ) | (139 | ) | (21 | ) | (4,609 | ) | (13,165 | ) |
The following table provides an analysis of the anticipated contractual cash flows for the Group’s derivative instruments, excluding embedded derivatives and equity options, using undiscounted cash flows. Cash flows in foreign currencies are translated using spot rates at 31st December.
| 2007 | 2006 | |||||||
| Receivables | Payables | Receivables | Payables | |||||
| £m | £m | £m | £m | |||||
| Less than one year | 23,784 | (23,630 | ) | 13,980 | (13,988 | ) | ||
| Between one and two years | 389 | (323 | ) | 536 | (428 | ) | ||
| Between two and three years | 10 | (14 | ) | 350 | (304 | ) | ||
| Between three and four years | 34 | (39 | ) | 1 | (9 | ) | ||
| Between four and five years | 216 | (246 | ) | 24 | (32 | ) | ||
| Greater than five years | – | (5 | ) | – | (21 | ) | ||
| Gross contractual cash flows | 24,433 | (24,257 | ) | 14,891 | (14,782 | ) | ||
| 142 | GSK Annual Report 2007 |
| FINANCIAL STATEMENTS | |
| Notes to the financialstatements | |
| Notes to the financial statements | |
| continued | |
41 Financial instruments and related disclosurescontinued
Derivative financial instruments and hedging programmes
The following table sets out the principal amounts and fair values of derivatives held by GSK.
| 2007 | 2006 | |||||||||||
| Fair value | Fair value | |||||||||||
| Principal | Principal | |||||||||||
| amount | Assets | Liabilities | amount | Assets | Liabilities | |||||||
| £m | £m | £m | £m | £m | £m | |||||||
| Cash flow hedges: | ||||||||||||
| Cross currency swaps | 368 | 57 | – | 338 | 44 | – | ||||||
| Fair value hedges: | ||||||||||||
| Interest rate swaps | 1,989 | 7 | (6 | ) | 2,196 | 6 | (51 | ) | ||||
| Net investment hedges: | ||||||||||||
| Foreign exchange contracts | (9,553 | ) | – | (220 | ) | (5,049 | ) | 11 | – | |||
| Cross currency swaps | 388 | 111 | – | 394 | 106 | – | ||||||
| Derivatives designated as accounting hedges | (6,808 | ) | 175 | (226 | ) | (2,121 | ) | 167 | (51 | ) | ||
| Foreign exchange contracts | 10,156 | 287 | (40 | ) | 5,510 | 9 | (25 | ) | ||||
| Equity related instruments: | ||||||||||||
| Options and warrants | 4 | 4 | – | 407 | 13 | (12 | ) | |||||
| Equity collar | 532 | 7 | (2 | ) | 270 | – | (12 | ) | ||||
| Embedded derivatives | 92 | 3 | (2 | ) | 43 | 4 | – | |||||
| Other derivatives | 10,784 | 301 | (44 | ) | 6,230 | 26 | (49 | ) | ||||
| Total derivative instruments | 3,976 | 476 | (270 | ) | 4,109 | 193 | (100 | ) | ||||
| Analysed as: | ||||||||||||
| Current | 475 | (262 | ) | 80 | (40 | ) | ||||||
| Non-current | 1 | (8 | ) | 113 | (60 | ) | ||||||
| Total | 476 | (270 | ) | 193 | (100 | ) | ||||||
Derivative financial instruments
The principal amount on foreign exchange contracts is calculated based on outstanding positions at the balance sheet date, calculated net by currency and buy/sell side position. The majority of contracts are for periods of 12 months or less.
Included in ‘Equity related instruments’ above are variable sale forward contracts in Quest Diagnostics, Inc. and various equity warrants. At 31st December 2006 the Group also held put and call options in Theravance, Inc. Further information on the Quest and Theravance derivatives is provided below.
In 2002, GSK hedged part of the equity value of its holdings in Quest, an associated undertaking, through a series of variable sale forward contracts. The contracts (‘the equity collar’) were renewed in 2006 and are structured in five series, each over two million Quest shares, and mature between 2010 and 2012. The fair value of the contracts at 31st December 2007 was a liability of $4 million (£2 million) (2006 – $24 million (£12 million)). A second series of hedging contracts over an additional 10 million shares was entered into on 15th February 2007. These contracts are also structured in five series, each over two million Quest shares, and mature between 2013 and 2015. The fair value of the contracts at 31st December 2007 was an asset of $15 million (£7 million).
At 31st December 2006 the Group held a put option agreement whereby Theravance’s shareholders could sell up to half of their Theravance shares to GSK at a pre-determined price. At 31st December 2006, this option was recorded as a liability of $19 million (£10 million). This option expired unexercised in August 2007.
At 31st December 2006, the Group held a call option agreement whereby it could purchase half of the outstanding Theravance shares in issue at a pre-determined price. At 31st December 2006, this option was recorded as an asset of $15 million (£8 million). This option expired unexercised in July 2007.
At 31st December 2007, the Group held outstanding foreign exchange contracts consisting primarily of currency swaps with a total fair value of £247 million (2006 – £16 million liability). These represent hedges of intercompany loans and deposits, but are not designated as accounting hedges. Changes in fair value are taken to profit and loss in the period to offset the exchange gains and losses on the related inter-company lending and borrowing.
| GSK Annual Report 2007 | 143 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
41 Financial instruments and related disclosurescontinued
Cash flow hedges
The Group has entered into a cross currency swap and designated it a cash flow hedge converting fixed Euro interest, payable annually, to fixed Yen payments. The bond matures in 2009. The risk being hedged is the variability of cash flows arising from currency fluctuations. No ineffectiveness is assumed on the hedge.
All cash flows relating to the hedge are expected to occur within the next two years. The amounts recognised in equity are recycled to the income statement to offset the exchange gains or losses in the same period on the underlying bond as a result of revaluation at the balance sheet date.
The amount recognised in equity in 2007 for cross currency interest rate swaps was £10 million credit (2006 – £30 million credit). The amount recycled from equity to the income statement in 2007 for cross currency interest rate swaps to offset the exchange loss on the underlying bond recognised in the income statement was £14 million (2006 – £32 million). The net fair value movements on cash flow hedges are disclosed in the Consolidated statement of recognised income and expense.
Fair value hedges
The Group has designated interest rate swaps and the interest element of one of its two cross currency swaps as a fair value hedge. The risk being hedged is the variability of the fair value of the bonds arising from interest rate fluctuations. Gains and losses on fair value hedges are disclosed in Note 12, ‘Finance costs’.
Net investment hedges
Foreign exchange contracts and the currency element of one of the Group’s two cross currency swaps have been designated as net investment hedges in respect of the foreign currency translation risk principally arising on consolidation of the Group’s net investment in its US dollar, Euro and Yen foreign operations. In addition, Euro loan capital issued during the year of€3.5 billion, and€750 million from previous years, has been designated as a non-monetary net investment hedge in respect of the foreign currency translation risk principally arising on consolidation of the Group’s net investment in its Euro operations. Net investment hedge ineffectiveness is disclosed in Note 11, ‘Finance income’.
The Group operates share option schemes, whereby options are granted to employees to acquire shares or ADSs in GlaxoSmithKline plc at the grant price, savings-related share option schemes and share award schemes, whereby awards are granted to employees to acquire shares or ADSs in GlaxoSmithKline plc at no cost, subject to the achievement by the Group of specified performance targets. In 2004, the Group introduced a new share award scheme, the Restricted Share Value Plan, whereby awards are granted to employees to acquire shares or ADSs in GlaxoSmithKline plc at no cost after a three year vesting period. The granting of restricted share awards has replaced the granting of options to certain employees as the cost of the scheme more readily equates to the potential gain to be made by the employee.
The Group operates share option schemes and savings-related share option schemes. Grants under share option schemes are normally exercisable between three and ten years from the date of grant. Grants of restricted shares and share awards are normally exercisable at the end of the three year vesting/performance period. Grants under savings-related share option schemes are normally exercisable after three years’ saving.
Options under the share option schemes are normally granted at the market price ruling at the date of grant. In accordance with UK practice, the majority of options under the savings-related share option schemes are granted at a price 20 per cent20% below the market price ruling at the date of grant. In accordance with the exemption granted in UITF 17 (revised) no charge
Share options awarded to the profitDirectors and, losswith effect from the 2004 grant, the CET are subject to performance criteria.
| 144 | GSK Annual Report 2007 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
42 Employee share schemescontinued
Option pricing
For the purposes of valuing options to arrive at the stock-based compensation charge, the Black-Scholes option pricing model has been used. The assumptions used in the model for 2005, 2006 and 2007 are as follows:
| 2007 | 2006 | 2005 | |||||
| Risk-free interest rate | 4.7% – 5.3% | 4.2% – 5.0% | 4.0% – 4.8% | ||||
| Dividend yield | 4.0% | 3.3% | 3.0% | ||||
| Volatility | 17% – 25% | 18% – 29% | 21% – 28% | ||||
| Expected lives of options granted under: | |||||||
| Share option schemes | 5 years | 5 years | 5 years | ||||
| Savings-related share option schemes | 3 years | 3 years | 3 years | ||||
| Weighted average share price for grants in the year: | |||||||
| Ordinary shares | £14.41 | £14.64 | 13.15 | ||||
| ADSs | $57.59 | $51.40 | 47.42 | ||||
Volatility was determined based on the three year share price history. The fair value of performance share plan grants take into account is made in relationmarket conditions. Expected lives of options were determined based on weighted average historic exercises of options.
| Share option | Share option | Savings-related | |||||||||||||||||||
| Options outstanding | schemes - shares | schemes - ADSs | share option schemes | ||||||||||||||||||
| Weighted | Weighted | Weighted | Weighted | Weighted | Weighted | ||||||||||||||||
| Number | exercise | fair | Number | exercise | fair | Number | exercise | fair | |||||||||||||
| 000 | price | value | 000 | price | value | 000 | price | value | |||||||||||||
| At 1st January 2005 | 197,781 | £14.92 | 110,479 | $46.57 | 10,141 | £9.44 | |||||||||||||||
| Options granted | 516 | £12.57 | £2.76 | 956 | $45.66 | $9.90 | 5,167 | £11.45 | £3.68 | ||||||||||||
| Options exercised | (10,483 | ) | £9.91 | (7,537 | ) | $38.83 | (5,732 | ) | £9.16 | ||||||||||||
| Options lapsed | (20,888 | ) | £17.16 | (8,306 | ) | $50.26 | (810 | ) | £11.02 | ||||||||||||
| At 31st December 2005 | 166,926 | £14.97 | 95,592 | $46.86 | 8,766 | £10.66 | |||||||||||||||
| Options granted | 9,776 | £14.78 | £3.53 | 7,940 | $51.36 | $11.59 | 2,069 | £11.40 | £3.41 | ||||||||||||
| Options exercised | (13,244 | ) | £11.66 | (13,310 | ) | $41.78 | (2,009 | ) | £9.48 | ||||||||||||
| Options lapsed | (6,755 | ) | £15.35 | (1,791 | ) | $46.88 | (653 | ) | £10.97 | ||||||||||||
| At 31st December 2006 | 156,703 | £15.22 | 88,431 | $48.02 | 8,173 | £11.11 | |||||||||||||||
| Options granted | 10,587 | £14.82 | £3.07 | 8,624 | $57.58 | $10.93 | 3,212 | £10.50 | £2.87 | ||||||||||||
| Options exercised | (9,863 | ) | £12.10 | (18,149 | ) | $44.27 | (1,140 | ) | £9.74 | ||||||||||||
| Options lapsed | (8,386 | ) | £15.64 | (1,632 | ) | $50.90 | (1,707 | ) | £11.33 | ||||||||||||
| At 31st December 2007 | 149,041 | £15.38 | 77,274 | $49.91 | 8,538 | £11.02 | |||||||||||||||
| Range of exercise prices | £10.76 | – | £19.77 | $37.09 | – | $61.35 | £9.52 | – | £11.45 | ||||||||||||
| Weighted average remaining contractual life | 4.32 years | 5.14 years | 2.2 years | ||||||||||||||||||
| GSK Annual Report 2007 | 145 |
Back to these savings-relatedContents
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
42 Employee share option schemes.schemescontinued
| Options outstanding | Share option | Share option | Savings-related | ||||||||||
| schemes – shares | schemes – ADSs | share option schemes | |||||||||||
| Weighted | Weighted | Weighted | |||||||||||
| Number | exercise | Number | exercise | Number | exercise | ||||||||
| (000) | price | (000) | price | (000) | price | ||||||||
| At 31st December 2001 | 179,936 | £15.67 | 73,825 | $50.31 | 8,200 | £14.13 | |||||||
| Options granted | 33,454 | £11.91 | 22,991 | $37.57 | 9,793 | £9.16 | |||||||
| Options exercised | (8,857 | ) | £10.55 | (1,504 | ) | $21.75 | (398 | ) | £14.04 | ||||
| Options cancelled | (7,061 | ) | £17.53 | (4,435 | ) | $54.69 | (4,607 | ) | £14.41 | ||||
| At 31st December 2002 | 197,472 | £15.20 | 90,877 | $47.34 | 12,988 | £10.29 | |||||||
| Options granted | 32,750 | £12.84 | 23,630 | $43.34 | 1,416 | £10.20 | |||||||
| Options exercised | (4,728 | ) | £4.75 | (1,828 | ) | $22.22 | (112 | ) | £10.23 | ||||
| Options cancelled | (19,789 | ) | £7.45 | (6,150 | ) | $32.73 | (3,709 | ) | £12.23 | ||||
| At 31st December 2003 | 205,705 | £14.89 | 106,529 | $46.58 | 10,583 | £9.59 | |||||||
| Options granted | 9,837 | £11.23 | 9,222 | $42.99 | 1,580 | £9.52 | |||||||
| Options exercised | (5,764 | ) | £6.54 | (1,845 | ) | $25.65 | (232 | ) | £9.18 | ||||
| Options cancelled | (11,997 | ) | £15.33 | (3,427 | ) | $48.28 | (1,790 | ) | £10.46 | ||||
| At 31st December 2004 | 197,781 | £14.92 | 110,479 | $46.57 | 10,141 | £9.44 | |||||||
| Range of exercise prices | £3.98 | – £19.77 | $12.83 | – $61.35 | £9.16 | – £14.12 | |||||||
In order to encourage employees to convert options, excluding savings-related share options, held over Glaxo Wellcome or SmithKline Beecham shares or ADSs, into those over GlaxoSmithKline shares or ADSs, a programme was established to give an additional cash benefit of 10 per cent10% of the exercise price of the original option provided that the employee did not voluntarily leave the Group for two years from the date of the merger and did not exercise the option before the earlier of six months from the expiry date of the original option and two years from the date of the merger. The cash benefit will also be paid if the options expire unexercised if the market price is below the exercise price on the date of expiry.
| Options outstanding at 31st December 2004 | Share option | Share option | Savings-related | ||||||||||||||||||||||||||||||||||
| schemes – shares | schemes – ADSs | share option schemes | |||||||||||||||||||||||||||||||||||
| Options outstanding | Share option | Share option | Savings-related | ||||||||||||||||||||||||||||||||||
| at 31st December 2007 | schemes - shares | schemes - ADSs | share option schemes | ||||||||||||||||||||||||||||||||||
| Weighted | Latest | Weighted | Latest | Weighted | Latest | Weighted | Latest | Weighted | Latest | Latest | |||||||||||||||||||||||||||
| Number | exercise | exercise | Number | exercise | exercise | Number | exercise | exercise | Number | exercise | exercise | Number | exercise | exercise | Number | Exercise | exercise | ||||||||||||||||||||
| Year of grant | (000) | price | date | (000) | price | date | (000) | price | date | 000 | price | date | 000 | price | date | 000 | price | date | |||||||||||||||||||
| 1995 | 3,266 | £7.17 | 15.11.05 | 522 | $21.82 | 15.11.05 | – | – | – | ||||||||||||||||||||||||||||
| 1996 | 3,980 | £8.41 | 01.12.06 | 956 | $27.60 | 21.11.06 | – | – | – | ||||||||||||||||||||||||||||
| 1997 | 7,979 | £11.64 | 13.11.07 | 3,978 | $40.30 | 13.11.07 | – | – | – | ||||||||||||||||||||||||||||
| 1998 | 16,270 | £16.93 | 23.11.08 | 6,041 | $54.25 | 23.11.08 | – | – | – | 13,609 | £16.91 | 23.11.08 | 4,137 | $54.42 | 23.11.08 | – | – | – | |||||||||||||||||||
| 1999 | 17,344 | £18.17 | 01.12.09 | 7,619 | $60.13 | 24.11.09 | – | – | – | 14,477 | £18.19 | 01.12.09 | 6,695 | $60.18 | 24.11.09 | – | – | – | |||||||||||||||||||
| 2000 | 18,759 | £14.87 | 11.09.10 | 366 | $58.88 | 16.03.10 | – | – | – | 14,012 | £14.90 | 11.09.10 | 310 | $58.88 | 09.08.10 | – | – | – | |||||||||||||||||||
| 2001 | 59,320 | £18.09 | 28.11.11 | 37,939 | $51.82 | 28.11.11 | 270 | £14.12 | 31.05.05 | 39,870 | £18.12 | 28.11.11 | 23,532 | $51.84 | 28.11.11 | – | – | – | |||||||||||||||||||
| 2002 | 31,280 | £11.90 | 03.12.12 | 21,231 | $37.53 | 03.12.12 | 7,419 | £9.16 | 31.05.06 | 16,817 | £11.96 | 03.12.12 | 6,712 | $37.64 | 03.12.12 | – | – | – | |||||||||||||||||||
| 2003 | 29,960 | £12.65 | 15.12.13 | 22,682 | $43.38 | 15.12.13 | 878 | £10.20 | 31.05.07 | 22,151 | £12.67 | 15.12.13 | 11,877 | $43.54 | 15.12.13 | – | – | – | |||||||||||||||||||
| 2004 | 9,623 | £11.21 | 02.12.14 | 9,145 | $42.98 | 02.12.14 | 1,574 | £9.52 | 31.05.08 | 8,273 | £11.23 | 03.12.14 | 7,664 | $43.19 | 02.12.14 | 307 | £9.52 | 31.05.08 | |||||||||||||||||||
| 2005 | 195 | £13.06 | 01.11.15 | 439 | $47.33 | 01.11.15 | 3,689 | £11.45 | 31.05.09 | ||||||||||||||||||||||||||||
| 2006 | 9,245 | £14.69 | 28.11.16 | 7,445 | $51.29 | 28.07.16 | 1,373 | £11.40 | 31.05.10 | ||||||||||||||||||||||||||||
| 2007 | 10,392 | £14.81 | 25.07.17 | 8,463 | $57.58 | 25.07.17 | 3,169 | £10.50 | 31.05.11 | ||||||||||||||||||||||||||||
| Total | 197,781 | £14.92 | 110,479 | $46.57 | 10,141 | £9.44 | 149,041 | £15.38 | 77,274 | $49.91 | 8,538 | £11.02 | |||||||||||||||||||||||||
All of the above options are exercisable, except all options over shares and ADSs granted in 2002, 20032005, 2006 and 20042007 and the savings-related share options granted in 2002, 20032005, 2006 and 2004.2007.
There has been no change in the effective exercise price of any outstanding options during the year. No further options were granted between 31st December 2004 and 25th February 2005.
| Options exercisable | Share option | Share option | Savings-related | |||||||||
| at 31st December 2007 | schemes - shares | schemes - ADSs | share option schemes | |||||||||
| Weighted | Weighted | Weighted | ||||||||||
| Number | exercise | Number | exercise | Number | exercise | |||||||
| 000 | price | 000 | price | 000 | price | |||||||
| At 31st December 2005 | 128,316 | £15.77 | 64,265 | $48.56 | 1,429 | £9.16 | ||||||
| At 31st December 2006 | 137,983 | £15.51 | 71,238 | $48.32 | 179 | £10.20 | ||||||
| At 31st December 2007 | 129,209 | £15.47 | 60,927 | $48.70 | 307 | £9.52 | ||||||
| 146 | GSK Annual Report 2007 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
36 42 Employee share schemescontinued
| Options exercisable | Share option | Share option | Savings-related | ||||||||||
| schemes – shares | schemes – ADSs | share option schemes | |||||||||||
| Weighted | Weighted | Weighted | |||||||||||
| Number | exercise | Number | exercise | Number | exercise | ||||||||
| (000) | price | (000) | price | (000) | price | ||||||||
| At 31st December 2002 | 72,611 | £14.33 | 27,129 | $48.89 | 2,227 | £13.27 | |||||||
| At 31st December 2003 | 79,693 | £14.56 | 22,364 | $49.82 | 192 | £16.48 | |||||||
| At 31st December 2004 | 126,917 | £16.49 | 57,421 | $51.75 | 270 | £14.12 | |||||||
GlaxoSmithKline share award schemes
Performance Share Plan
The Group operates a Performance Share Plan whereby awards are granted to Directors and senior executives at no cost. The percentage of each award that vests is based upon the performance of the Group over a three year measurement period. The performance conditions consist of two parts, each of which applies to 50 per cent50% of the award. For awards granted in 2002 and 2003, the first part of the condition compares GlaxoSmithKline’sGSK’s Total Shareholder Return (TSR) over the period with the TSR of companies in the UK FTSE 100 Index over the same period. For awards granted in 2004, and subsequent years, the first part of the condition compares GlaxoSmithKline’sGSK’s TSR over the period with the TSR of 13 pharmaceutical companies in the comparator group over the same period. TheFor all awards, the second part of the performance condition compares GlaxoSmithKline’sGSK’s earnings per share growth to the increase in the UK Retail Prices Index over the three year performance period. Awards granted to Directors and members of the CET from 15th December 2003 are subject to a single performance condition which compares GlaxoSmithKline’sGSK’s TSR over the period with the TSR of companies in the comparator group over the same period.
| Other awards | |||||||||||||
| Shares | Weighted | ADSs | Weighted | ||||||||||
| Number of shares and ADSs issuable | Shares | ADSs | Number (000) | fair value | Number (000) | fair value | |||||||
| Number (000) | Number (000) | ||||||||||||
| At 31st December 2001 | 3,181 | 1,760 | |||||||||||
| At 1st January 2005 | 4,349 | 3,355 | |||||||||||
| Awards granted | 863 | 477 | 130 | £9.02 | 88 | $32.34 | |||||||
| Awards exercised | (728 | ) | (197 | ) | (375 | ) | (199 | ) | |||||
| Awards cancelled | (152 | ) | (97 | ) | (477 | ) | (237 | ) | |||||
| At 31st December 2002 | 3,164 | 1,943 | |||||||||||
| At 31st December 2005 | 3,627 | 3,007 | |||||||||||
| Awards granted | 1,070 | 832 | 2,068 | £10.06 | 1,452 | $35.13 | |||||||
| Awards exercised | (625 | ) | (189 | ) | (438 | ) | (187 | ) | |||||
| Awards cancelled | (109 | ) | (107 | ) | (501 | ) | (238 | ) | |||||
| At 31st December 2003 | 3,500 | 2,479 | |||||||||||
| At 31st December 2006 | 4,756 | 4,034 | |||||||||||
| Awards granted | 1,778 | 1,339 | 2,071 | £10.26 | 1,501 | $34.87 | |||||||
| Awards exercised | (409 | ) | (187 | ) | (147 | ) | (77 | ) | |||||
| Awards cancelled | (520 | ) | (276 | ) | (949 | ) | (1,131 | ) | |||||
| At 31st December 2004 | 4,349 | 3,355 | |||||||||||
| At 31st December 2007 | 5,731 | 4,327 | |||||||||||
Restricted Share Value Plan
The Group operates a Restricted Share Value Plan whereby awards are granted, in the form of shares, to certain employees at no cost. The award vestsawards vest after three years withyears. There are no performance criteria attached.
| Number of shares and ADSs issuable | Shares | ADSs | |||||||||||
| Shares | Weighted | ADSs | Weighted | ||||||||||
| Number of shares and ADSs issuable | Number (000) | Number (000) | Number (000) | fair value | Number (000) | fair value | |||||||
| At 31st December 2003 | – | – | |||||||||||
| At 1st January 2005 | 4,419 | 3,562 | |||||||||||
| Awards granted | 4,419 | 3,562 | 403 | £12.00 | 511 | $44.39 | |||||||
| Awards exercised | (138 | ) | (143 | ) | |||||||||
| Awards cancelled | (170 | ) | (81 | ) | |||||||||
| At 31st December 2004 | 4,419 | 3,562 | |||||||||||
| At 31st December 2005 | 4,514 | 3,849 | |||||||||||
| Awards granted | 4,759 | £13.45 | 4,126 | $52.53 | |||||||||
| Awards exercised | (131 | ) | (66 | ) | |||||||||
| Awards cancelled | (348 | ) | (280 | ) | |||||||||
| At 31st December 2006 | 8,794 | 7,629 | |||||||||||
| Awards granted | 5,155 | £13.22 | 4,231 | $52.08 | |||||||||
| Awards exercised | (3,643 | ) | (3,038 | ) | |||||||||
| Awards cancelled | (672 | ) | (539 | ) | |||||||||
| At 31st December 2007 | 9,634 | 8,283 | |||||||||||
| GSK Annual Report 2007 | 147 |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
3642 Employee share schemescontinued
Employee Share Ownership Plan Trusts
The Group sponsors Employee Share Ownership Plan (ESOP) Trusts to acquire and hold shares in GlaxoSmithKline plc to satisfy awards made under employee incentive plans and options granted under employee share option schemes. The trustees of the ESOP Trusts purchase shares on the open market with finance provided by the Group by way of loans or contributions. The expected costCosts of running the obligationsESOP Trusts are charged to deliver shares under the schemesincome statement. Shares held by the ESOP Trusts are normally spread overdeducted from other reserves and held at the periods of service in respect of which the awards and options are granted. An accelerated charge was made in 2000 in respect of the outstanding cost of providing shares for awards and options which became exercisable solely as a result of the merger.
| Shares held for share award schemes | 2003 | ||||
| 2004 | (restated) | ||||
| Number of shares (000) | 22,992 | 7,748 | |||
| £m | £m | ||||
| Nominal value | 6 | 2 | |||
| Carrying value | 213 | 84 | |||
| Market value | 281 | 99 | |||
| Shares held for share option schemes | |||||
| 2004 | 2003 | ||||
| Number of shares (000) | 151,535 | 170,066 | |||
| £m | £m | ||||
| Nominal value | 38 | 43 | |||
| Carrying value | 2,361 | 2,645 | |||
| Market value | 1,852 | 2,177 | |||
Results in 2003 have been restated following the implementation of UITF17 (revised). UITF17 (revised) requires that the minimum expense should be the difference between the fair value of the shares at the date of award and the amount that an employee mayproceeds receivable from employees on exercise. If there is deemed to be requireda permanent diminution in value this is reflected by a transfer to pay for the shares (i.e. the intrinsic value of the award).
retained earnings. The Trusts also acquire and hold shares to meet notional dividends re-invested on deferred awards under the SmithKline Beecham Mid-Term Incentive Plan. The trustees have waived their rights to dividends on the shares held by the Employee Share OwnershipESOP Trusts.
Option pricingFor the purposes of valuing options to arrive at the stock-based compensation adjustment in the Reconciliation to US accounting principles in Note 37, the Black-Scholes option pricing model has been used. The assumptions used in the model for 2004 and 2003 are as follows:
| 2004 | 2003 | ||||
| Risk-free interest rate | 3.3% – 4.6% | 4.2% – 4.9% | |||
| Dividend yield | 3.1% | 2.9% | |||
| Volatility | 26% – 29% | 34% | |||
| Expected lives of options granted under: | |||||
| Share option schemes | 5 years | 5 years | |||
| Savings-related share option schemes | 3 years | 3 years | |||
37Reconciliation to US accounting principles
The analyses and reconciliations presented in this Note represent the financial information prepared on the basis of US Generally Accepted Accounting Principles (US GAAP) rather than UK GAAP.
Summary of material differences between UK and US GAAPAcquisition of SmithKline BeechamThe combination of Glaxo Wellcome plc and SmithKline Beecham plc was accounted for as a merger (pooling of interests) in accordance with UK GAAP. Under US GAAP, this business combination did not qualify for pooling of interests accounting and Glaxo Wellcome was determined to be the accounting acquirer in a purchase business combination.
Accordingly the net assets of SmithKline Beecham were fair valued as at the date of acquisition. As a result of the fair value exercise, increases in the values of SmithKline Beecham’s inventory, tangible fixed assets, investments and pension obligations were recognised and fair market values attributed to its intangible assets, mainly product rights (inclusive of patents and trade marks) and in-process research and development, together with appropriate deferred taxation effects. The difference between the cost of acquisition and the fair value of the assets and liabilities of SmithKline Beecham has been recorded as goodwill.
Capitalised interestUnder UK GAAP, the Group does not capitalise interest. US GAAP requires interest incurred as part of the cost of constructing fixed assets to be capitalised and amortised over the life of the asset.
Computer softwareUnder UK GAAP, the Group capitalises costs incurred in acquiring and developing computer software for internal use where the software supports a significant business system and the expenditure leads to the creation of a durable asset. For US GAAP, the Group applies SOP 98-1, ‘Accounting for the Costs of Computer Software Developed or Obtained for Internal Use’, which restricts the categories of costs which can be capitalised.
Goodwill and intangible fixed assetsUnder UK GAAP, goodwill arising on acquisitions before 1998 accounted for under the purchase method has been eliminated against shareholders’ funds. Additionally, UK GAAP requires that on subsequent disposal or closure of a business, any goodwill previously taken directly to shareholders’ funds is then charged against income. Under UK GAAP, goodwill arising on acquisitions from 1998 is capitalised and amortised over a period not exceeding 20 years. Intangible assets are amortised over their estimated useful economic life except in the case of certain acquired brands where the end of the useful economic life of the brand cannot be foreseen.
Under US GAAP, goodwill arising on acquisitions prior to 30th June 2001 was capitalised and amortised over a period not exceeding 40 years. All intangible assets, including brands, were amortised over a finite life. In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) 142, ‘Goodwill and Other Intangible Assets’. SFAS 142 requires that goodwill no longer be amortised over its estimated useful life. The Group must instead identify and value its reporting units for the purpose of assessing, at least annually, potential impairment of goodwill allocated to each reporting unit.
Additionally, the Group reassesses the useful lives of existing recognised intangible assets. Intangible assets deemed to have indefinite lives are no longer amortised, instead they are tested annually for potential impairment. Separable intangible assets with finite lives continue to be amortised over their useful lives.
The Group adopted SFAS 142 as of 1st January 2002. The implementation of SFAS 142 resulted in no impairment of the Group’s goodwill and an initial impairment of £173 million (£127 million net of tax) on indefinite-lived assets. This is shown as a cumulative effect of an accounting change.
Under UK GAAP, costs to be incurred in integrating and restructuring the Wellcome, SmithKline Beecham and Block Drug businesses following the acquisitions in 1995, 2000 and 2001 respectively were charged to the profit and loss account post acquisition. Under US GAAP, certain of such costs were considered in the allocation of purchase consideration thereby affecting the goodwill arising on acquisition.
Under UK GAAP, certain intangible assets related to specific compounds or products which are purchased from a third party and are developed for commercial applications are capitalised. Under US GAAP, payments made for these compounds or products which are still in development and have not yet received regulatory approval are charged directly to the profit and loss account until such time that they receive regulatory approval.
Restructuring costsUnder UK GAAP, restructuring costs incurred following acquisitions were charged to the profit and loss account post acquisition. For US GAAP purposes, certain of these costs were recognised as liabilities upon acquisition in the opening balance sheet.
Other restructuring costs are recorded as a provision under UK GAAP when a restructuring plan has been announced. Under US GAAP, a provision may only be recognised when further criteria are met or the liability is incurred. Accordingly, adjustments have been made to eliminate the UK GAAP provisions for restructuring costs that do not meet US GAAP requirements.
Marketable securitiesMarketable securities consist primarily of equity securities and certain other liquid investments. Under UK GAAP, these securities are stated at the lower of cost and net realisable value. Under US GAAP these securities are considered available for sale under SFAS 115 ‘Accounting for certain investments in debt and equity securities’ and are carried at fair value, with the unrealised gains and losses, net of tax, recorded as a separate component of shareholders’ equity.
Equity securities are reviewed at least annually for other than temporary impairment. The factors considered are:
| Shares held for share award schemes | 2007 | 2006 | ||
| Number of shares (‘000) | 45,247 | 37,508 | ||
| £m | £m | |||
| Nominal value | 11 | 9 | ||
| Carrying value | 242 | 196 | ||
| Market value | 579 | 504 | ||
| Shares held for share option schemes | 2007 | 2006 | ||
| Number of shares (‘000) | 89,283 | 115,943 | ||
| £m | £m | |||
| Nominal value | 22 | 29 | ||
| Carrying value | 1,375 | 1,803 | ||
| Market value | 1,142 | 1,558 | ||
Gross unrealised gains and losses on marketable securities were £60 million and £3 million respectively at 31st December 2004 (£68 million and £5 million respectively at 31st December 2003).
| Notes to the financial statements |
37Reconciliation to US accounting principles continued
Pensions and other post-retirement benefitsThe key differences between UK (SSAP 24) and US GAAP in relation to defined benefit pension plans are:
During 2002, the Group decided to align the measurement date for all of its pension and post-retirement benefit plans to 31st December as certain of the Group’s plans had a measurement date for assets and liabilities of 30th September.
The impact, reflected as a cumulative effect of an accounting change, was a £37 million credit, net of tax, to income.
Stock-based compensationUnder UK GAAP, share options are accounted for as equity when exercised, valued at the issuance price. Under US GAAP, the Group applies SFAS 123, ‘Accounting for stock-based compensation’, and related accounting interpretations in accounting for its option plans which require options to be fair valued at their grant date and included in profit and loss over the vesting period of the options.
The Group is entitled to receive a tax deduction for the amount treated as compensation under US tax rules for employee stock options which have been exercised by US employees during the year. Under UK GAAP, this is treated as a reduction of tax expense whereas, under US GAAP, a portion of this amount is credited to equity.
Employee Share Ownership Plan TrustsPrior to 2004, under UK GAAP shares of the Group’s stock held by the ESOP Trusts were recorded at cost, less a provision representing the difference between the cost and the option exercise price, and accounted for as fixed asset investments. Projected losses on the exercise of the options covered by the shares were recorded through the profit and loss account over the life of the options. In 2004, UITF Abstract 38, ‘Accounting for ESOP Trusts’, and related amendments to UITF Abstract 17, ‘Employee share schemes’, were implemented in the Group’s UK GAAP financial statements. UITF 38 changes the presentation of an entity’s own shares held in an ESOP Trust from requiring them to be recognised as assets to requiring them to be deducted in arriving at shareholders’ funds, as under US GAAP. UITF 17 (revised) requires that the minimum expense should be the difference between the fair value of the shares at the date of award and the amount that an employee may be required to pay for the shares (i.e. the intrinsic value of the award).
These changes have been accounted for as prior year adjustments under UK GAAP and the reconciliations of Profit attributable to shareholders and Equity shareholders’ funds from UK GAAP to US GAAP have been restated accordingly to reconcile from the restated UK GAAP figures.
A reconciling difference between UK GAAP and US GAAP remains in respect of the charge recognised against profit. Under US GAAP, shares purchased by the ESOP Trusts are accounted for within shareholders’ equity with gains and losses on issuance of shares to employees being recorded as adjustments to shareholders’ equity.
Guarantor obligationsThe Group adopted the FASB’s Financial Interpretation No. 45 (FIN 45), ‘Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others’ with effect from 1st January 2003.
This requires that the Group recognise and measure, at fair value, on a prospective basis, certain guarantees issued or modified after 31st December 2002. Under UK GAAP, such guarantor obligations are recognised when further additional criteria are met or the liability is incurred.
Derivative instrumentsSFAS 133, ‘Accounting for Derivative Instruments and Hedging Activities’, as amended by SFAS 137 and SFAS 138 and as interpreted by the Derivatives Implementation Group, was adopted by the Group with effect from 1st January 2001. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively, referred to as derivatives) and for hedging activities. Under UK GAAP, some derivative instruments used for hedging are not recognised on the balance sheet and the matching principle is used to match the gain or loss under these hedging contracts to the foreign currency transaction or profits to which they relate. SFAS 133 requires that an entity recognise all derivatives as either assets or liabilities in the consolidated balance sheet and measure those instruments at fair value. Changes in fair value over the period are recorded in current earnings unless hedge accounting is obtained. The Group does not designate any of its derivatives as qualifying hedge instruments under SFAS 133. SFAS 133 prescribes requirements for designation and documentation of hedging relationships and ongoing assessments of effectiveness in order to qualify for hedge accounting.
The Group also evaluates contracts for ‘embedded’ derivatives, and considers whether any embedded derivatives have to be bifurcated, or separated, from the host contracts in accordance with SFAS 133 requirements. If embedded derivatives exist and are not clearly and closely related to the host contract, they are accounted for separately from the host contract as derivatives.
Gains and losses related to the fair value adjustments of all derivative instruments are classified in the consolidated statement of income and cash flows in accordance with the nature of the derivative.
The fair value and book value of derivative instruments in respect of financial assets and liabilities as at 31st December 2004 is disclosed in the ‘Classification and fair value of financial assets and liabilities’ table in Note 34.
37Reconciliation to US accounting principles continued
Valuation of derivative instrumentsThe fair value of derivative instruments is sensitive to movements in the underlying market rates and variables. The Group monitors the fair value of derivative instruments on at least a quarterly basis, with a formal review every six months. Derivatives including interest rate swaps and cross-currency swaps are valued using standard valuation models, counterparty valuations, or third party valuations. Standard valuation models used by the Group consider relevant discount rates, the market yield curve on the valuation date, forward currency exchange rates and counterparty risk. All significant rates and variables are obtained from market sources. All valuations are based on the remaining term to maturity of the instrument. Foreign exchange contracts are valued using forward rates observed from quoted prices in the relevant markets when possible. The Group assumes parties to long-term contracts are economically viable but reserves the right to exercise early termination rights if economically beneficial when such rights exist in the contract.
DividendsUnder UK GAAP, dividends proposed are provided for in the year in respect of which they are recommended by the Board of Directors for approval by the shareholders. Under US GAAP, such dividends are not provided for until declared by the Board of Directors.
Consolidated summary statement of cash flowsThe US GAAP cash flow statement reports changes in cash and cash equivalents, which includes short-term highly liquid investments with original maturities of three months or less. Only three categories of cash flows are reported: operating activities (including tax and interest); investing activities (including capital expenditure, acquisitions and disposals together with cash flows from available for sale current asset investments); and financing activities (including dividends paid). A summary statement of cash flows is presented on page 143.
Cash and cash equivalentsUnder UK GAAP, the cash balance includes only cash at bank and other cash balances. Under US GAAP, cash and cash equivalents include cash at bank and certain liquid investments with original maturities of three months or less.
Comprehensive income statementThe requirement of SFAS 130, ‘Reporting comprehensive income’, to provide a comprehensive income statement is met under UK GAAP by the Statement of total recognised gains and losses (pages 90 and 91).
ReclassificationsCertain prior year balances have been reclassified for comparative purposes. Certain amounts previously presented in aggregate in the reconciliation of profit under US GAAP to UK GAAP have been presented separately in the current year presentation to provide more information related to these adjustments.
Sales incentivesIn accordance with UK GAAP, certain amounts paid by the Group to its customers are recorded as promotional expense included in operating income. Under US GAAP, these items are recorded as a reduction in revenue. While these items do not result in a net impact to the income statement under US GAAP, the amount that would be classified as a reduction in revenue in 2004 would be £373 million (2003 – £324 million).
Variable interest entitiesIn January 2003, the FASB issued Interpretation No. 46 (FIN 46), ‘Consolidation of Variable Interest Entities’, and in December 2003 issued FIN 46R, a revision of this Interpretation. Under the revised Interpretation, certain entities, known as Variable Interest Entities (VIEs), must be consolidated by the ‘primary beneficiary’ of the entity. The primary beneficiary is generally defined as having the majority of the risks and rewards arising from the VIE. Additionally, for VIEs in which a significant, but not majority, variable interest is held, certain disclosures are required.
The Group has completed a review of potential VIEs and, as a consequence, has consolidated Theravance Inc. from May 2004 (see Note (c) on page 145). No other VIEs of which the Group is the primary beneficiary were identified.
Recent Financial Accounting Standards Board (FASB) pronouncementsIn May 2004, the FASB issued FASB Staff Position (FSP) FAS 106-2, ‘Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003’, superseding FSP 106-1. FSP 106-2 addresses the accounting implications of the Act for an entity that sponsors a post-retirement health care plan providing prescription drug benefits. The Act introduces in the USA a prescription drug benefit under Medicare, as well as a federal subsidy to sponsors of certain post-retirement health care plans. For companies that elected for deferral under FSP 106-1, FSP 106-2 is effective for reporting periods commencing after 15th June 2004. The estimated amount of the federal subsidy is treated as a prior service gain and credited to the profit and loss account over the average service lives of the employees. Under US GAAP, this change resulted in a decrease of £71 million in the accumulated benefit obligation and a reduction of £2 million in net periodic post-retirement benefit cost for the year ended 31st December 2004.
37Reconciliation to US accounting principles continued
The following is a summary of the material adjustments to profit and shareholders’ funds which would be required if US GAAP had been applied instead of UK GAAP.
| Profit | 2003 | 2002 | |||||||
| 2004 | (restated) | (restated) | |||||||
| Notes | £m | £m | £m | ||||||
| Profit attributable to shareholders under UK GAAP | 4,302 | 4,478 | 3,930 | ||||||
| Goodwill amortisation reversal including goodwill in associated undertakings | (a) | 17 | 19 | 18 | |||||
| Amortisation and impairment of intangible assets | (b) | (1,426 | ) | (2,292 | ) | (4,089 | ) | ||
| Acquisition and disposal of product rights | (b) | (210 | ) | (105 | ) | (181 | ) | ||
| Capitalised interest | (17 | ) | 23 | 20 | |||||
| Tangible fixed assets | (2 | ) | 5 | 25 | |||||
| Disposal of interest in associate | (81 | ) | – | – | |||||
| Disposal of goodwill in subsidiaries | 3 | – | – | ||||||
| Product divestments | (1 | ) | 7 | 7 | |||||
| Equity investments | (30 | ) | (31 | ) | (8 | ) | |||
| Recognition of cost of sales on fair value step-up of inventory | (13 | ) | – | – | |||||
| Pensions and post-retirement benefits | (f) | (162 | ) | (122 | ) | (138 | ) | ||
| Stock-based compensation | (296 | ) | (372 | ) | (320 | ) | |||
| Derivative instruments and hedging | 33 | (41 | ) | 37 | |||||
| Fair value of put option granted to minority shareholders | (c) | 17 | – | – | |||||
| Guarantor obligations | 19 | (21 | ) | – | |||||
| Restructuring | (12 | ) | 98 | 37 | |||||
| Tax benefits on exercise of US stock options | (d) | (10 | ) | (13 | ) | (13 | ) | ||
| Deferred taxation | (d) | 661 | 787 | 1,178 | |||||
| Variable interest entities | (c) | (60 | ) | – | – | ||||
| Net income under US GAAP before cumulative effect of changes | |||||||||
| in accounting principles | 2,732 | 2,420 | 503 | ||||||
| Cumulative effect of changes in accounting principles | – | – | (90 | ) | |||||
| Net income after cumulative effect of changes in accounting principles | 2,732 | 2,420 | 413 | ||||||
| Certain items for the year ended 31st December 2002 have been reclassified for comparative purposes. | |||||||||
| Earnings per share under US GAAP | 2004 | 2003 | 2002 | ||||||
| pence | pence | pence | |||||||
| Basic net income per share before cumulative effect of changes | |||||||||
| in accounting principles under US GAAP | 47.6 | 41.7 | 8.5 | ||||||
| Cumulative effect of changes in accounting principles per share | |||||||||
| under US GAAP | – | – | (1.5 | ) | |||||
| Basic net income per share after cumulative effect of changes | |||||||||
| in accounting principles under US GAAP | 47.6 | 41.7 | 7.0 | ||||||
| Diluted net income per share before cumulative effect of changes | |||||||||
| in accounting principles under US GAAP | 47.5 | 41.6 | 8.5 | ||||||
| Cumulative effect of changes in accounting principles per share | |||||||||
| under US GAAP | – | – | (1.5 | ) | |||||
| Diluted net income per share after cumulative effect of changes | |||||||||
| in accounting principles under US GAAP | 47.5 | 41.6 | 7.0 | ||||||
| Earnings per ADS under US GAAP | 2004 | 2003 | 2002 | ||||||
| $ | $ | $ | |||||||
| Basic net income per ADS before cumulative effect of changes | |||||||||
| in accounting principles under US GAAP | 1.74 | 1.37 | 0.26 | ||||||
| Cumulative effect of changes in accounting principles per ADS | |||||||||
| under US GAAP | – | – | (0.05 | ) | |||||
| Basic net income per ADS after cumulative effect of changes | |||||||||
| in accounting principles under US GAAP | 1.74 | 1.37 | 0.21 | ||||||
| Diluted net income per ADS before cumulative effect of changes | |||||||||
| in accounting principles under US GAAP | 1.74 | 1.36 | 0.26 | ||||||
| Cumulative effect of changes in accounting principles per ADS | |||||||||
| under US GAAP | – | – | (0.05 | ) | |||||
| Diluted net income per ADS after cumulative effect of changes | |||||||||
| in accounting principles under US GAAP | 1.74 | 1.36 | 0.21 | ||||||
37 Reconciliation to US accounting principles continued
| Equity shareholders’ funds | 2003 | ||||||||
| 2004 | (restated) | ||||||||
| Notes | £m | £m | |||||||
| Equity shareholders’ funds under UK GAAP | 5,925 | 5,059 | |||||||
| US GAAP adjustments: | |||||||||
| Goodwill | (a) | 17,982 | 17,986 | ||||||
| Product rights | (b) | 13,994 | 15,652 | ||||||
| Pension intangible asset | (b) | 102 | 128 | ||||||
| Tangible fixed assets | 43 | 45 | |||||||
| Capitalised interest | 180 | 198 | |||||||
| Marketable securities | 49 | 84 | |||||||
| Other investments | 554 | 832 | |||||||
| Fair value step-up of inventory | 1 | – | |||||||
| Pensions and other post-retirement benefits | (f) | (1,287 | ) | (1,702 | ) | ||||
| Restructuring costs | 80 | 92 | |||||||
| Derivative instruments and hedging | (15 | ) | 26 | ||||||
| Fair value of put option granted to minority shareholders | (c) | 17 | – | ||||||
| Guarantor obligations | (2 | ) | (21 | ) | |||||
| Dividends | 683 | 808 | |||||||
| Deferred taxation | (e) | (4,204 | ) | (5,071 | ) | ||||
| Variable interest entities | (c) | (60 | ) | – | |||||
| Shareholders’ equity under US GAAP | 34,042 | 34,116 | |||||||
| Consolidated statement of cash flows under US GAAP | 2004 | 2003 | 2002 | ||||||
| £m | £m | £m | |||||||
| Net cash provided by operating activities | 4,618 | 4,895 | 5,345 | ||||||
| Net cash used in investing activities | (988 | ) | (904 | ) | (1,051 | ) | |||
| Net cash used in financing activities | (3,038 | ) | (3,051 | ) | (4,002 | ) | |||
| Net increase in cash and cash equivalents | 592 | 940 | 292 | ||||||
| Exchange rate movements | (93 | ) | (36 | ) | (42 | ) | |||
| Cash and cash equivalents at beginning of year | 1,986 | 1,082 | 832 | ||||||
| Cash and cash equivalents at end of year | 2,485 | 1,986 | 1,082 | ||||||
| Notes to the Profit and Equity shareholders’ funds reconciliations | |||||||||
| (a) Goodwill | |||||||||
| The following tables set out the UK to US GAAP adjustments required to the UK GAAP statement of profit and loss and balance sheet in respect of goodwill including goodwill in respect of associated undertakings: | |||||||||
| Income statement | 2004 | 2003 | 2002 | ||||||
| £m | £m | £m | |||||||
| Amortisation under UK GAAP | (17 | ) | (19 | ) | (18 | ) | |||
| Amortisation under US GAAP | – | – | – | ||||||
| UK to USGAAP adjustment for amortisation (including goodwill in respect of associated undertakings) | 17 | 19 | 18 | ||||||
| Balance sheet | 2004 | 2003 | |||||||
| £m | £m | ||||||||
| Goodwill under UK GAAP | 139 | 143 | |||||||
| Goodwill under US GAAP | 18,121 | 18,129 | |||||||
| UK to US GAAP adjustments | 17,982 | 17,986 | |||||||
Of the £18,121 million (2003 - £18,129 million) US GAAP goodwill balance at 31st December 2004, £15,875 million (2003 - £15,875 million) is in respect of the goodwill arising on the acquisition of SmithKline Beecham by Glaxo Wellcome in 2000.
37Reconciliation to US accounting principles continued
The following tables present the changes in goodwill allocated to the Group’s reportable segments:
| Consumer | |||||||
| Pharmaceuticals | Healthcare | Total | |||||
| £m | £m | £m | |||||
| At 31st December 2002 | 15,679 | 2,481 | 18,160 | ||||
| Additions | 2 | – | 2 | ||||
| Exchange adjustments | (13 | ) | (20 | ) | (33 | ) | |
| At 31st December 2003 | 15,668 | 2,461 | 18,129 | ||||
| Asset written off | (1 | ) | – | (1 | ) | ||
| Exchange adjustments | 5 | (12 | ) | (7 | ) | ||
| At 31st December 2004 | 15,672 | 2,449 | 18,121 | ||||
| (b) Intangible assets | |||||||
| The following tables set out the UK to US GAAP adjustments required to the UKGAAP statement of profit and loss and balance sheet in respect of intangible assets: | |||||||
| Income statement | 2004 | 2003 | 2002 | ||||
| £m | £m | £m | |||||
| Amortisation charge under UK GAAP | 94 | 74 | 60 | ||||
| Amortisation charge under US GAAP | 1,516 | 1,641 | 1,787 | ||||
| UK to US GAAP adjustment for amortisation | 1,422 | 1,567 | 1,727 | ||||
| Impairment charge under UK GAAP | 22 | 41 | 46 | ||||
| Impairment charge under US GAAP | 26 | 766 | 2,581 | ||||
| UK to US GAAP adjustment for impairments | 4 | 725 | 2,535 | ||||
| Cumulative effect of change in accounting principle | – | – | (173 | ) | |||
| UK to US GAAP adjustment for impairments for the period | 4 | 725 | 2,362 | ||||
Following the initial implementation of SFAS 142 in 2002, the carrying value of the brands determined to have indefinite lives were reviewed and an impairment of £173 million (£127 million net of tax) was recognised. This was recorded as a cumulative effect of a change in accounting principle. In addition to the above adjustments for amortisation and impairments, further UK to US GAAP adjustments arose during the year of £173 million (2003 - £105 million; 2002 - £181 million) in respect of the acquisition of licences, patents etc. which are capitalised under UK GAAP but charged directly to research and development expense under US GAAP, and £37 million (2003 and 2002 – £nil) in respect of disposals of product rights which have a higher carrying value under US GAAP than under UK GAAP. | |||||||
| Balance sheet | 2004 | 2003 | |||||
| £m | £m | ||||||
| Intangible assets under UK GAAP | 2,003 | 1,697 | |||||
| Intangible assets under US GAAP | 16,099 | 17,477 | |||||
| UK to US GAAP adjustments | 14,096 | 15,780 | |||||
| Less pensions intangible asset | (102 | ) | (128 | ) | |||
| Net UK to US GAAP product rights adjustments | 13,994 | 15,652 | |||||
| Intangible assets under US GAAP are analysed as follows: | |||||||
| 2004 | 2003 | ||||||
| £m | £m | ||||||
| Acquired products | 10,589 | 12,054 | |||||
| Licences, patents etc. | 371 | 126 | |||||
| Brands | 5,037 | 5,169 | |||||
| Pensions | 102 | 128 | |||||
| Intangible assets under US GAAP | 16,099 | 17,477 | |||||
| The following tables present details of the Group’s intangible assets, differentiating between those subject to amortisation and those which are not subject to amortisation: | |||||||
| 2004 | 2003 | ||||||
| £m | £m | ||||||
| Intangible assets subject to amortisation | 11,922 | 13,234 | |||||
| Intangible assets not subject to amortisation | 4,177 | 4,243 | |||||
| Intangible assets under US GAAP | 16,099 | 17,477 | |||||
37 Reconciliation to US accounting principles continued
The following intangible assets are subject to amortisation:
| 2004 | 2003 | ||||
| Product | Product | ||||
| rights | rights | ||||
| £m | £m | ||||
| Cost | 21,555 | 21,329 | |||
| Accumulated amortisation | (6,872 | ) | (5,360 | ) | |
| Impairment | (2,761 | ) | (2,735 | ) | |
| Net | 11,922 | 13,234 | |||
The carrying values of certain product rights were reviewed and an impairment of £26 million has been recorded. In 2003, impairments of £658 million were recorded, of which £633 million related to Paxil which was impaired following the launch in the USA of a generic Paxil product. Fair values are determined using a discounted cash flow model.
As discussed in Note 30 ‘Legal proceedings’, a number of distributors of generic drugs have filed applications to market generic versions of a number of the Group’s products prior to the expiration of the Group’s patents. If generic versions of products are launched in future periods at earlier dates than the Group currently expects, impairments of the carrying value of the products may arise.
The estimated future amortisation expense for the next five years for intangible assets subject to amortisation as of 31st December 2004 is as follows:
| Year | £m | ||
| 2005 | 1,528 | ||
| 2006 | 1,487 | ||
| 2007 | 1,473 | ||
| 2008 | 1,472 | ||
| 2009 | 756 | ||
| Total | 6,716 | ||
Intangible assets which are not subject to amortisation include a pension asset of £102 million at 31st December 2004 (£128 million at 31st December 2003) and certain product rights. The intangible assets relating to product rights are analysed as follows:
| 2004 | 2003 | |||
| £m | £m | |||
| Cost | 4,652 | 4,693 | ||
| Impairment | (577 | ) | (578 | ) |
| Net | 4,075 | 4,115 | ||
An impairment charge of £nil was recognised during 2004 (2003 – £108 million).
(c) Theravance
In May 2004, the Group formed a strategic alliance with Theravance Inc. to develop and commercialise novel medicines across a variety of important therapeutic areas. Under the terms of the alliance, Theravance received $129 million, a significant part of which related to the Group’s purchase of Theravance shares. The Group has a call option in 2007 to further increase its ownership to over 50 per cent at a significant premium to the price paid in the 2004 transaction. Theravance’s shareholders have a put option at a lower exercise price to cause GlaxoSmithKline to acquire up to half of their outstanding stock in 2007. Given the maximum number of shares subject to the put option, the Group’s obligation is capped at $525 million. The Group has an exclusive option to license potential new medicines from all of Theravance’s programmes until August 2007. Upon exercising its option over a Theravance programme, the Group will be responsible for the relevant development, manufacturing and commercialisation activities. Depending on the success of such programmes, Theravance will receive clinical, regulatory and commercial milestone payments and royalties on the subsequent sales of medicines. Based on the assessment performed, the Group is the primary beneficiary of Theravance, as defined by FIN 46R, and as a result Theravance has been consolidated into the Group’s US GAAP financial statements from May 2004. The net assets acquired were measured at fair value. The principal adjustment to the carrying value of the net assets in Theravance’s balance sheet prior to the acquisition was recognition of in-process research and development (IPR&D) at a valuation of £273 million. The IPR&D was written-off immediately after the acquisition in accordance with US GAAP purchase accounting. The effect of consolidating Theravance has been to decrease shareholders’ equity and net income by £60 million.
Additionally, the Group has accounted for the Theravance put option discussed above in accordance with SFAS 150, ‘Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity’, which requires the Group to record the fair value of the put option as a liability. The fair value of the Theravance put option at 31st December 2004 is £69 million; as at the initial consolidation of Theravance, the value of the put option was £86 million. In accordance with SFAS 133, ‘Accounting for Derivative Instruments and Hedging Activities’ the call option is not recognised in the financial statements as it is not readily convertible into cash.
37 Reconciliation to US accounting principles continued
(d) Taxation
| 2003 | 2002 | |||||
| 2004 | (restated) | (restated) | ||||
| Total tax expense | £m | £m | £m | |||
| UK GAAP: | ||||||
| Current tax expense | 1,707 | 2,001 | 1,432 | |||
| Deferred tax (credit)/expense | (6 | ) | (272 | ) | 32 | |
| Total tax expense | 1,701 | 1,729 | 1,464 | |||
| US GAAP: | ||||||
| Current tax expense | 1,717 | 2,014 | 1,445 | |||
| Deferred tax credit | (667 | ) | (1,059 | ) | (1,146 | ) |
| Total tax expense | 1,050 | 955 | 299 | |||
| Cumulative effect of changes in accounting principles | – | – | (34 | ) | ||
| Total tax expense | 1,050 | 955 | 265 | |||
| UK to US GAAP adjustments: | ||||||
| Current tax expense | 10 | 13 | 13 | |||
| Deferred tax credit | (661 | ) | (787 | ) | (1,178 | ) |
| Total tax expense | (651 | ) | (774 | ) | (1,165 | ) |
| Cumulative effect of changes in accounting principles | – | – | (34 | ) | ||
| Total tax expense | (651 | ) | (774 | ) | (1,199 | ) |
| (e) Deferred taxation under US GAAP | ||||||
| Classification of GlaxoSmithKline’s deferred taxation liabilities and assets under US GAAP is as follows: | ||||||
| 2003 | ||||||
| 2004 | (restated) | |||||
| £m | £m | |||||
| Liabilities | ||||||
| Stock valuation adjustment | (51 | ) | (52 | ) | ||
| Current deferred taxation liabilities | (51 | ) | (52 | ) | ||
| Accelerated capital allowances | (664 | ) | (689 | ) | ||
| Product rights | (4,454 | ) | (4,917 | ) | ||
| Other timing differences | 66 | (229 | ) | |||
| Total deferred taxation liabilities | (5,103 | ) | (5,887 | ) | ||
| Assets | ||||||
| Intra-Group profit | 594 | 485 | ||||
| Other timing differences | 675 | 607 | ||||
| Current deferred taxation assets | 1,269 | 1,092 | ||||
| Asset disposal | (31 | ) | (59 | ) | ||
| Pensions and other post-retirement benefits | 57 | 86 | ||||
| Tax losses | 20 | 94 | ||||
| Manufacturing restructuring | 66 | 132 | ||||
| Legal and other disputes | 157 | 167 | ||||
| Other timing differences | 188 | 127 | ||||
| Total deferred taxation assets | 1,726 | 1,639 | ||||
| Net deferred taxation under US GAAP | (3,377 | ) | (4,248 | ) | ||
| Net deferred taxation under UK GAAP | 827 | 823 | ||||
| UK to US GAAP adjustment | (4,204 | ) | (5,071 | ) | ||
37 Reconciliation to US accounting principles continued
(f) Pensions and post-retirement costs under US GAAP
| 2004 | 2003 | 2002 | ||||
| £m | £m | £m | ||||
| UK pension schemes | 225 | 278 | 103 | |||
| US pension schemes | 54 | 79 | 67 | |||
| Other overseas pension schemes | 77 | 83 | 51 | |||
| Unfunded post-retirement healthcare schemes | 96 | 118 | 78 | |||
| Post-employment costs | 18 | 24 | 40 | |||
| 470 | 582 | 339 | ||||
| Analysed as: | ||||||
| Funded defined benefit/hybrid schemes | 298 | 389 | 149 | |||
| Unfunded defined benefit schemes | 37 | 26 | 48 | |||
| Defined contribution schemes | 21 | 25 | 24 | |||
| Unfunded post-retirement healthcare schemes | 96 | 118 | 78 | |||
| Post-employment costs | 18 | 24 | 40 | |||
| 470 | 582 | 339 | ||||
The disclosures below include the additional information required by SFAS 132R. The pension costs of the UK, US and major overseas defined benefit pension plans have been restated in the following tables in accordance with US GAAP. Pension costs in 2004 of £5 million (2003 – £9 million; 2002 – £12 million), in respect of minor retirement plans, which have not been recalculated in accordance with the requirements of SFAS 87, have been excluded.
| 2004 | 2003 | 2002 | ||||
| Net periodic pension cost for the major retirement plans | £m | £m | £m | |||
| Service cost | 213 | 211 | 219 | |||
| Interest cost | 400 | 392 | 388 | |||
| Expected return on plan assets | (431 | ) | (408 | ) | (470 | ) |
| Amortisation of prior service cost | 14 | 17 | 20 | |||
| Amortisation of transition obligation | 2 | 3 | (6 | ) | ||
| Amortisation of net actuarial loss | 115 | 79 | 3 | |||
| Net periodic pension cost under US GAAP | 313 | 294 | 154 | |||
| Termination benefits and curtailment costs | 13 | 112 | 56 | |||
| Adjustment for change in accounting principle | – | – | (62 | ) | ||
| During 2002, the Group decided to align the measurement date for all of its pension plans. As certain of the Group’s pension plans had a measurement date for pension assets and liabilities of 30th September, the Group elected to change the measurement date for these plans from 30th September to 31st December. | ||||||
| 2004 | 2003 | 2002 | ||||
| Major assumptions used in computing pension costs | %pa | %pa | %pa | |||
| Rates of future pay increases | 4.25 | 4.25 | 4.25 | |||
| Discount rate | 5.25 | 5.50 | 6.00 | |||
| Expected long-term rates of return on plan assets | 7.00 | 7.50 | 7.75 | |||
| In aggregate, average international plan assumptions did not vary significantly from US assumptions. | ||||||
| Estimated future benefit payments | £m | |||||
| 2005 | 297 | |||||
| 2006 | 306 | |||||
| 2007 | 317 | |||||
| 2008 | 330 | |||||
| 2009 | 346 | |||||
| 2010–2014 | 2,011 | |||||
37 Reconciliation to US accounting principles continued
| 2004 | 2003 | ||||
| Change in benefit obligation | £m | £m | |||
| Benefit obligation at beginning of year | 7,866 | 6,760 | |||
| Amendments | 2 | (20 | ) | ||
| Service cost | 213 | 211 | |||
| Interest cost | 400 | 392 | |||
| Plan participants’ contributions | 15 | 16 | |||
| Actuarial loss | 137 | 899 | |||
| Benefits paid | (345 | ) | (328 | ) | |
| Termination benefits and curtailment costs | 5 | 92 | |||
| Exchange | (122 | ) | (156 | ) | |
| Benefit obligation at end of year | 8,171 | 7,866 | |||
| Benefit obligation at end of year for pension plans with accumulated benefit obligations in excess of plan assets | 5,554 | 6,960 | |||
| The accumulated benefit obligation at 31st December 2004 was £7,691 million (31st December 2003 – £7,391 million). | |||||
| 2004 | 2003 | ||||
| Change in plan assets | £m | £m | |||
| Fair value of plan assets at beginning of year | 5,968 | 4,855 | |||
| Actual return on plan assets | 651 | 979 | |||
| Employer contributions | 465 | 596 | |||
| Plan participants’ contributions | 15 | 16 | |||
| Benefits paid | (345 | ) | (328 | ) | |
| Exchange | (64 | ) | (150 | ) | |
| Fair value of plan assets at end of year | 6,690 | 5,968 | |||
| Fair value of plan assets at end of year for pension plans with accumulated benefit obligations in excess of plan assets | 4,519 | 5,525 | |||
| Plan assets consist primarily of investments in UK and overseas equities, fixed interest securities, securities linked to the UK Retail Prices Index and property. At 31st December 2004 UK equities included 0.3 million GlaxoSmithKline shares (2003 – 0.5 million shares) with a market value of £4 million (2003 – £7 million). | |||||
| Normal employer contributions are expected to be approximately £360 million in 2005. | |||||
| 2004 | 2003 | ||||
| Funded status | £m | £m | |||
| Funded status | (1,481 | ) | (1,898 | ) | |
| Unrecognised net actuarial loss | 1,900 | 2,123 | |||
| Unrecognised prior service cost | 75 | 96 | |||
| Unrecognised transition obligation | 24 | 26 | |||
| Net amount recognised | 518 | 347 | |||
| 2004 | 2003 | ||||
| Amounts recognised in the statement of financial position | £m | £m | |||
| Prepaid benefit cost | 365 | 18 | |||
| Accrued pension liability | (1,065 | ) | (1,471 | ) | |
| Intangible asset | 102 | 128 | |||
| Accumulated other comprehensive income | 1,116 | 1,672 | |||
| Net amount recognised | 518 | 347 | |||
37Reconciliation to US accounting principles continued
Post-retirement healthcare under US GAAP
The post-retirement healthcare costs of the UK, US and major overseas post-retirement healthcare schemes have been restated in the following tables in accordance with US GAAP. Costs in 2004 of £nil (2003 – £13 million, 2002 – £nil), which have not been recalculated, have been excluded.
| 2004 | 2003 | 2002 | ||||
| Net healthcare cost | £m | £m | £m | |||
| Service cost | 32 | 29 | 23 | |||
| Interest cost | 55 | 64 | 53 | |||
| Amortisation of prior service cost | (1 | ) | (2 | ) | (1 | ) |
| Amortisation of net actuarial loss | 11 | 14 | 3 | |||
| Net healthcare cost | 97 | 105 | 78 | |||
| The major assumptions used in calculating the net healthcare cost were: | %pa | %pa | %pa | |||
| Rate of future healthcare inflation | 9.0 to 5.0 | 10.0 to 5.0 | 11.0 to 5.0 | |||
| Discount rate | 5.75 | 6.25 | 6.75 | |||
| The rate of future healthcare inflation reflects the fact that the benefits of certain groups of participants are capped. | ||||||
| 2004 | 2003 | |||||
| Change in benefit obligation | £m | £m | ||||
| Benefit obligation at beginning of year | 975 | 830 | ||||
| Amendments | – | (3 | ) | |||
| Service cost | 32 | 29 | ||||
| Interest cost | 55 | 64 | ||||
| Plan participants’ contributions | 8 | 8 | ||||
| Actuarial loss | 6 | 192 | ||||
| Benefits paid | (47 | ) | (49 | ) | ||
| Exchange | (64 | ) | (96 | ) | ||
| Benefit obligation at end of year | 965 | 975 | ||||
| Change in plan assets | ||||||
| Fair value of plan assets at beginning of year | – | – | ||||
| Employer and plan participants’ contributions | 47 | 49 | ||||
| Benefits paid | (47 | ) | (49 | ) | ||
| Fair value of plan assets at end of year | – | – | ||||
| Funded status | ||||||
| Funded status | (965 | ) | (975 | ) | ||
| Unrecognised net actuarial loss | 340 | 371 | ||||
| Unrecognised prior service cost | (14 | ) | (17 | ) | ||
| Accrued post-retirement healthcare cost | (639 | ) | (621 | ) | ||
| 1% decrease | 1% increase | |||||
| Impact of a one per cent variation in the rate of future healthcare inflation | £m | £m | ||||
| Effect on total service and interest cost | (7 | ) | 8 | |||
| Effect on provision for post-retirement benefits | (75 | ) | 82 | |||
3843 Principal Group companies
The following represent the principal subsidiary and associated undertakings of the GlaxoSmithKline Group at 31st December 2004.2007. Details are given of the principal country of operation, the location of the headquarters, the business segment and the business activities. The equity share capital of these undertakings is wholly owned by the Group except where its percentage interest is shown otherwise. All companies are incorporated in their principal country of operation except where stated.
Europe | Location | Subsidiary undertaking | Segment | Activity | % | ||||||||
| England | Brentford | +GlaxoSmithKline Holdings Limited | Ph,CH | h | |||||||||
| Brentford | +GlaxoSmithKline Holdings (One) Limited | Ph,CH | h | ||||||||||
| Brentford | +GlaxoSmithKline Services Unlimited | Ph,CH | s | ||||||||||
| Brentford | GlaxoSmithKline Finance plc | Ph,CH | f | ||||||||||
| Brentford | GlaxoSmithKline Capital plc | Ph | f | ||||||||||
| Brentford | SmithKline Beecham p.l.c. | Ph,CH | d e h m p r | ||||||||||
| Brentford | Wellcome Limited | Ph,CH | h | ||||||||||
| Greenford | Glaxo Group Limited | Ph | h | ||||||||||
| Greenford | Glaxo Operations UK Limited | Ph | p | ||||||||||
| Brentford | Glaxo Wellcome International B.V. | Ph,CH | h | ||||||||||
| Brentford | Glaxo Wellcome Investments B.V. | Ph,CH | h | ||||||||||
| GlaxoSmithKline Export Limited | Ph | e | |||||||||||
| Brentford | |||||||||||||
| GlaxoSmithKline Research & Development Limited | Ph | d r | |||||||||||
| GlaxoSmithKline UK Limited | Ph | m p | |||||||||||
| Brentford | SmithKline Beecham (Investments) Limited | Ph,CH | f | ||||||||||
| Brentford | Setfirst Limited | Ph,CH | h | ||||||||||
| Greenford | The Wellcome Foundation Limited | Ph | p | ||||||||||
| Cambridge | Domantis Limited | Ph | d r | ||||||||||
| Brentford | SmithKline Beecham Overseas Limited | Ph | h | ||||||||||
| Brentford | SmithKline Beecham Holdings (UK) Limited | Ph | h | ||||||||||
| Brentford | GlaxoSmithKline (Netherlands) B.V. (i) | Ph | h | ||||||||||
| Austria | Vienna | GlaxoSmithKline Pharma G.m.b.H | Ph | m | |||||||||
| Belgium | Genval | GlaxoSmithKline S.A. | Ph | m | |||||||||
| Rixensart | GlaxoSmithKline Biologicals S.A. | Ph | d e m p r | ||||||||||
| Czech Republic | GlaxoSmithKline | Ph,CH | m | ||||||||||
| GlaxoSmithKline Consumer Healthcare A/S | CH | m | |||||||||||
| Brøndby | GlaxoSmithKline Pharma A/S | Ph | m | ||||||||||
| Espoo | GlaxoSmithKline | Ph | m | ||||||||||
| Marly le Roi | Groupe GlaxoSmithKline | Ph | h | ||||||||||
| Marly le Roi | Laboratoire GlaxoSmithKline S.A.S. | Ph | m r d | ||||||||||
| Marly le Roi | Glaxo Wellcome Production S.A.S. | Ph | p | ||||||||||
| Marly le Roi | GlaxoSmithKline Sante Grand Public S.A.S. | CH | m | ||||||||||
| Germany | Buehl | GlaxoSmithKline Consumer Healthcare GmbH & | CH | d h m p r s | |||||||||
| Munich | GlaxoSmithKline | Ph | d h m p r s | ||||||||||
| Greece | Athens | GlaxoSmithKline A.E.B.E | Ph,CH | m | |||||||||
| Setfirst (No.2) Limited | Ph,CH | h | |||||||||||
| Hungary | Budapest | GlaxoSmithKline Medicine and Healthcare Products Limited | Ph,CH | e m | |||||||||
| Italy | Verona | GlaxoSmithKline S.p.A. | Ph | d h m r | |||||||||
| Milan | GlaxoSmithKline Consumer Healthcare | CH | h m | ||||||||||
| Verona | GlaxoSmithKline Manufacturing S.p.A. | Ph | p | ||||||||||
| Luxembourg | Mamer | GlaxoSmithKline International (Luxembourg) S.A. | Ph,CH | f h | |||||||||
| Netherlands | Zeist | GlaxoSmithKline B.V. | Ph | m | |||||||||
| Utrecht | GlaxoSmithKline Consumer Healthcare B.V. | CH | m | ||||||||||
| GSK Annual Report 2007 | 149 |
| FINANCIAL STATEMENTS | |
Notes to the financial statements | |
| Notes to the financial statements | |
38 43 Principal Group companiescontinued
| Europe | Location | Subsidiary undertaking | Segment | Activity | % | |
| Norway | Oslo | GlaxoSmithKline AS | Ph | m | ||
| Poland | Poznan | GlaxoSmithKline Pharmaceuticals S.A. | Ph | 97 | ||
| Poznan | GSK Services Sp.z.o.o | Ph | m | |||
| Warsaw | GlaxoSmithKline Consumer Healthcare | CH | m e | |||
| Portugal | GlaxoSmithKline-Produtos Farmaceuticos, | Ph | m | |||
| Republic of | Carrigaline | SmithKline Beecham (Cork) Limited (ii) | Ph | p r | ||
| Ireland | Cork | GlaxoSmithKline Trading Services Limited (ii) | Ph | e | ||
| Dublin | GlaxoSmithKline Consumer Healthcare (Ireland) Limited | CH | m | |||
| Ph | ||||||
| Russian | Moscow | GlaxoSmithKline Trading ZAO | Ph | m | ||
| Federation | Moscow | GlaxoSmithKline Healthcare ZAO | CH | m | ||
| Spain | GlaxoSmithKline S.A. | Ph | m | |||
| Madrid | GlaxoSmithKline Consumer Healthcare S.A. | CH | m | |||
| Aranda de Duero | Ph | p | ||||
| Sweden | GlaxoSmithKline AB | Ph | m | |||
| Switzerland | Muenchenbuchsee | GlaxoSmithKline AG | Ph | m | ||
| USA | ||||||
| USA | Hamilton | Corixa Corporation | Ph | m p | ||
| Pittsburgh | CNS, Inc. | CH | m | |||
| Philadelphia | SmithKline Beecham Corporation | Ph,CH | d e h m p r s | |||
| Pittsburgh | GlaxoSmithKline Consumer Healthcare, L.P. | CH | m p | 88 | ||
| Pittsburgh | Block Drug Company, | CH | h m | |||
| Wilmington | GlaxoSmithKline Holdings (Americas) | Ph,CH | h | |||
| Liberty Corner | Reliant Pharmaceuticals, Inc. | Ph | m r | |||
| Wilmington | GlaxoSmithKline Capital Inc. | Ph | f | |||
| Americas | ||||||
| Bermuda | Hamilton | GlaxoSmithKline Insurance Ltd | Ph,CH | i | ||
| Canada | Mississauga | GlaxoSmithKline | Ph | m p r | ||
| Oakville | GlaxoSmithKline Consumer Healthcare Inc. | CH | m | |||
| Laval | ID Biomedical Corporation | Ph | d m p r | |||
| Laval | ID Biomedical Corporation of Quebec | Ph | d m p r | |||
| Asia Pacific | ||||||
| Australia | Boronia | Ph,CH | d e m p r | |||
| China | Hong Kong | GlaxoSmithKline Limited | Ph,CH | m | ||
| Tianjin | Sino-American Tianjin Smith Kline & French Laboratories Ltd | Ph | d m p r | 55 | ||
| India | Mumbai | GlaxoSmithKline Pharmaceuticals Limited | Ph | m p | ||
| Nabha | GlaxoSmithKline Consumer Healthcare Limited | CH | m p | |||
| Malaysia | Petaling Jaya | |||||
| GlaxoSmithKline Pharmaceutical Sdn Bhd | Ph | m | ||||
| GlaxoSmithKline Consumer Healthcare Sdn Bhd | CH | m | ||||
| New Zealand | Auckland | GlaxoSmithKline NZ Limited | Ph,CH | m | ||
| Pakistan | Karachi | GlaxoSmithKline Pakistan Limited | Ph,CH | m p e | 79 | |
| Philippines | Makati | GlaxoSmithKline Philippines | Ph,CH | m | ||
| Singapore | Singapore | Glaxochem Pte Ltd | Ph | h | ||
| Singapore | Glaxo Wellcome Manufacturing Pte Ltd | Ph | p | |||
| Singapore | GlaxoSmithKline Pte Ltd | Ph,CH | m | |||
| 150 | GSK Annual Report 2007 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
43 Principal Group companiescontinued
| Asia Pacific | Location | Subsidiary undertaking | Segment | Activity | % | |
| South Korea | Seoul | GlaxoSmithKline Korea | ||||
| Ph | m p | |||||
| Thailand | Bangkok | GlaxoSmithKline (Thailand) Limited | Ph,CH | m | ||
| Japan | Tokyo | GlaxoSmithKline K.K. | Ph,CH | d m p | ||
38 Principal Group companies continued
| Argentina | Buenos Aires | GlaxoSmithKline Argentina S.A. | Ph,CH | m p | |||
| Brazil | Rio de Janeiro | GlaxoSmithKline Brasil Ltda | Ph,CH | e m p | |||
| Colombia | Bogota | GlaxoSmithKline Colombia S.A. | Ph,CH | m | |||
| Mexico | Delegacion Tlalpan | GlaxoSmithKline Mexico S.A. de C.V. | Ph,CH | e m p s | |||
| Puerto Rico | Guaynabo | GlaxoSmithKline Puerto Rico Inc. | Ph | m | |||
| Cidra | SB Pharmco Puerto Rico Inc. | Ph | p | ||||
| Venezuela | Caracas | GlaxoSmithKline Venezuela C.A. | Ph,CH | m | |||
| Middle East & | |||||||
| Africa | |||||||
| Egypt | Cairo | GlaxoSmithKline S.A.E | Ph | m p | 91 | ||
| South Africa | Bryanston | GlaxoSmithKline South Africa (Pty) Ltd | Ph,CH | m p | |||
| Turkey | Istanbul | GlaxoSmithKline Ilaclari Sanayi ve Ticaret A.S. | Ph | m p | |||
| Location | Associated undertaking | Business | % | ||||
| 19 | |||||||
| Incorporated in the | |
| Exempt from the provisions of Section 7 of the Companies (Amendment) Act 1986 (Ireland). | |
| Consolidated as a subsidiary undertaking in accordance with Section 258 (4)(a) of the Companies Act 1985 on the grounds of dominant | |
| Equity accounted on the grounds of significant | |
| + | Directly held wholly owned subsidiary of GlaxoSmithKline |
Key
Business segment: Ph Pharmaceuticals, CH Consumer Healthcare
Business activity: d development, e exporting, f finance, h holding company, i insurance, m marketing, p production, r research, s service
Full details of all Group subsidiary and associated undertakings will be attached to the company’s Annual Return to be filed with the Registrar of Companies.Companies. Each of GlaxoSmithKline Capital Inc. and GlaxoSmithKline Capital plc is a wholly-owned finance subsidiary of the company, and the company has fully and unconditionally guaranteed the securities issued by each of GlaxoSmithKline Capital Inc. and GlaxoSmithKline Capital plc.
| GSK Annual Report 2007 | 151 |
| FINANCIAL STATEMENTS | |
Notes to the financial statements | |
| Notes to the financial | |
| continued | |
The Group is involved in significant legal and administrative proceedings, principally product liability, intellectual property, tax, antitrust and governmental investigations and related private litigation. The Group makes provision for these proceedings on a regular basis as summarised in Notes 2 and 29. The Group may make additional significant provisions for such legal proceedings as required in the event of further developments in these matters, consistent with generally accepted accounting principles. Litigation, particularly in the USA, is inherently unpredictable and excessive awards that may not be justified by the evidence may occur. The Group could in the future incur judgements or enter into settlements of claims that could result in payments that exceed its current provisions by an amount that would have a material adverse effect on the Group’s financial condition, results of operations and/or cash flows.
Intellectual property claims include challenges to the validity and enforceability of the Group’s patents on various products or processes and assertions of non-infringement of those patents. A loss in any of these cases could result in loss of patent protection for the product at issue. The consequences of any such loss could be a significant decrease in sales of that product and could materially affect future results of operations for the Group.
Legal expenses incurred and provisions related to legal claims are charged to selling, general and administration costs. Provisions are made, after taking appropriate legal and other specialist advice, when a reasonable estimate can be made of the likely outcome of the dispute. The Group has established an actuarially determined provision for product liability claims incurred but not yet reported as described in Note 29, ‘Other provisions’. At 31st December 2007, the Group’s aggregate provision for legal and other disputes (not including tax matters described in Note 14, ‘Taxation’) was £1.2 billion. The ultimate liability for legal claims may vary from the amounts provided and is dependent upon the outcome of litigation proceedings, investigations and possible settlement negotiations.
The most significant of those matters are described below.
Intellectual property
Advair/Seretide
In September 2004, the Group applied to the US Patent and Trademark Office (USPTO) for re-issue of its combination patent forAdvair, an inhaled combination of salmeterol and fluticasone propionate, which expires in September 2010. This followed an internal review which concluded that the language in the patent may not have accurately described all of the circumstances of the invention and may not have claimed the invention as precisely as it could. The objective of seeking re-issuance was to strengthen the protection afforded by the patent. The USPTO reissued the patent in February 2008. The reissued patent has the same September 2010 expiration date as the original composition patent and is listed in the register of pharmaceutical patents maintained by the US FDA, the Orange Book.
In October 2007, the Group filed a complaint with the Patent Dispute Chamber of the Regional Court in Düsseldorf, Germany against Neolab (UK) for infringement of its German patent claiming compositions containing the combination of salmeterol and fluticasone propionate as used inSeretide (known asViani in Germany).
The complaint is based on a threat to market a salmeterol/fluticasone combination product in Germany prior to patent expiry. The basic patent covering the combination product inSeretide expires in September 2010 but is subject to a Supplementary Protection Certificate which extends protection until September 2013. The action is in its early stages.
Argatroban
In December 2007, Encysive Pharmaceuticals Inc., Mitsubishi Kasei Corporation and the Group filed an action in the US District Court for the Southern District of New York against Barr Laboratories, Inc. for infringement of Mitsubishi’s pharmaceutical composition patent covering argatroban. Pursuant to a license from Mitsubishi, Encysive has developed argatroban for the treatment of heparin-induced thrombocytopenia and holds the New Drug Application approved by the US FDA. Encysive has licensed the US marketing rights to argatroban to the Group. The Mitsubishi patent expires in June 2014. Barr had filed an Abbreviated New Drug Application (ANDA) with the FDA with a certification of invalidity, unenforceability and non-infringement of the Mitsubishi patent. FDA approval of that ANDA is stayed until the earlier of May 2010 or resolution of the patent infringement action. The case is in its early stages.
Avandia, Avandamet and Avandaryl
In August 2003, the Group filed an action in the US District Court for the District of New Jersey against Teva Pharmaceuticals USA Inc. for infringement of the Group’s patent relating to the maleate salt form of rosiglitazone, the active ingredient in Avandia, which expires in 2015. In September 2003, the Group filed a comparable action in same court against Dr. Reddy’s Laboratories, alleging infringement of the same patent. Those actions were filed in response to ANDA filings with the FDA by Dr. Reddy’s Laboratories and Teva with certifications that the Group’s maleate salt patent was invalid, unenforceable, or not infringed. Teva subsequently filed a similar certification challenging the Group’s basic compound patent for rosiglitazone, and in January 2004 the Group commenced an action against Teva in the same court for infringement of that patent.
In January 2005, the Group filed an action in the US District Court for the District of New Jersey against Teva for infringement of the same two patents – the basic compound and maleate salt patents for rosiglitazone. Teva had filed an ANDA with the FDA for a generic version ofAvandamet with a certification that those patents were invalid, unenforceable, or not infringed.
In May 2007, the Group filed an action in the US District Court for the District of New Jersey against Teva for infringement of the Group’s patent related to the maleate salt form of rosiglitazone, and the Group’s basic patent for rosiglitazone. Teva had filed an ANDA with the FDA for a generic version ofAvandaryl with a certification that those patents were invalid, unenforceable, or not infringed.
In June 2007, the Group voluntarily dismissed its infringement claims in respect of the patent covering the maleate salt form of rosiglitazone. Since Dr. Reddy’s had not challenged the basic compound patent, the dismissal of the maleate salt claim dismissed all claims against Dr. Reddy’s in respect ofAvandia.
| 152 | GSK Annual Report 2007 |
| FINANCIAL STATEMENTS | |
| Notes to the | |
| Notes to the financial statements | |
| continued | |
44 Legal proceedingscontinued
With respect to the Group’s patent infringement actions against Teva in respect of the basic compound and maleate salt form patents, in August 2007 the parties reached a settlement which provides that Teva may enter the US market with its generic versions ofAvandia,Avandamet andAvandaryl oral tablets late in the first quarter 2012. Other terms of the settlement remain confidential.
Avodart
In February 2008, the Group filed an action in the US District Court for the District of Delaware against Barr Laboratories for infringement of the basic patent covering the active ingredient inAvodart and the compound generally and its use to treat benign prostate hypertrophy (BPH). The basic compound patent expires in November 2015 and the other two patents expire in September 2013. Barr had filed an ANDA with the FDA with a certification of invalidity, unenforceability and non-infringement of all three patents. FDA approval of Barr’s ANDA is stayed until the earlier of July 2010, or resolution of the patent infringement action. The case is in its early stages.
Boniva
In September 2007, Roche Laboratories commenced actions in the US District Court for the District of New Jersey against seven generic drug manufacturers, and in the US District Court for the Northern District of Illinois against an eighth such manufacturer in each case alleging infringement of Roche patents relating toBoniva tablets. Each of the defendants had filed an ANDA with the FDA with a certification of invalidity, unenforceability or non-infringement of at least one of the Roche patents. Only one manufacturer has challenged the basic compound patent which expires in March 2012. Final FDA approval of those ANDAs is stayed until the earlier of November 2010 or resolution of the relevant patent infringement action. The Group participates in the marketing ofBoniva pursuant to a co-promotion agreement with Roche. The cases are in their early stages.
Combivir
In November 2007, the Group filed an action in the District Court for the District of Delaware against Teva Pharmaceuticals for infringement of one of its patents relating toCombivir. The patent, which covers the combination of AZT and lamivudine to treat HIV, expires in May 2012. Teva had filed an ANDA with the FDA with a certification of invalidity, unenforceability and non-infringement of that combination patent. Teva did not challenge two other patents relating toCombivir that expire in 2010 and 2016. The case is in its early stages.
Coreg CR
In February 2008, the Group filed an action in the US District Court for the Eastern District of Pennsylvania against United Research Laboratories Inc./Mutual Pharmaceuticals Company, Inc. in respect of the Group’s patent relating to the crystalline salt form of carvedilol, the active ingredient inCoreg CR. URL/ Mutual had filed an ANDA with the FDA with a certification of invalidity, unenforceability and non-infringement of the patents covering the crystalline salt form and delayed release technology used for manufacturing that product which expire in 2023 and 2016, respectively. In January 2008, the USPTO reissued the Group’s patent on a method of use for administration of carvedilol with other therapeutic agents. The re-issued patent, which has been listed in the Orange Book, expires in 2016.
The Group’s action against URL/Mutual was amended to include a claim for infringement of the re-issued patent. FDA approval of URL/ Mutual’s ANDA is stayed until the earlier of June 2010 or resolution of the patent infringement action, but in no event can such approval issue prior to the expiration of the data exclusivity period in April 2010. The case is in its early stages.
Paxil/Seroxat
In the USA a number of distributors of generic drugs filed applications with the FDA to market generic versions ofPaxil/Seroxat (paroxetine hydrochloride) prior to the expiration in 2007 of the Group’s patent on paroxetine hyrdrochloride hemihydrate. In response the Group filed a number of patent infringement actions, all of which have concluded or been resolved except as described below. One distributor, Apotex, launched its generic product in the USA in September 2003. Additional generic products were launched by other defendants after March 2004.
The Group had filed two separate patent infringement actions against Apotex, one in the US District Court for the Northern District of Illinois and the other in the Eastern District of Pennsylvania. After appeals by the Group to the US Court of Appeals for the Federal Circuit (CAFC), which hears all appeals from US District Courts on patent matters, in each of these cases, and a remand of the matter to the same panel on one case, the relevant claim of the patent on paroxetine hydrochloride hemihydrate was ruled invalid. Other claims of other patents have been ruled invalid and/or not infringed, in some cases with appeals pending or planned, and other claims are pending trial.
In Europe, generic products containing paroxetine hydrochloride are now on the market in most European countries. Whilst some of these products are the subject of continuing litigation, most actions have now been concluded or settled. With respect to two manufacturers, Synthon BV and FAL, litigation is ongoing and counterclaims for unfair competition have been asserted against the Group.
Following the litigation in Canada with Apotex over several other patents related to paroxetine, Apotex launched its generic product in Canada in October 2003. Apotex alleged that as a result of that litigation it had been enjoined from launching that product after receipt of regulatory approval. An action by Apotex to recover damages related to the delay occasioned by those injunctions is ongoing.
Paxil CR
In November 2005, Mylan Pharmaceuticals filed an ANDA forPaxil CR (paroxetine hydrochloride controlled release formulation) with a certification of invalidity, unenforceability and non-infringement of several patents listed in the FDA Orange Book. There was no such certification in respect of the patent covering paroxetine hydrochloride hemihydrate, which Mylan admitted is the active ingredient in its product. That patent expired in June 2007, after giving effect to a grant of paediatric exclusivity by the FDA. As the Group did not file a patent infringement action against Mylan within the 45-day period provided under Hatch-Waxman, there is no 30-month stay of FDA approval of the Mylan ANDA.
A new US patent covering a delayed and controlled release formulation of paroxetine hydrochloride (Paxil CR) was issued to the Group in June 2007 and listed in the FDA Orange Book and thereafter the Group filed an action in the US District Court for the District of New Jersey against Mylan for infringement of that newly issued patent.
| GSK Annual Report 2007 | 153 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
44 Legal proceedingscontinued
Subsequently, the parties reached a settlement which permits Mylan to enter the market for all strengths ofPaxil CR no later than 1st October 2008. Other terms of the settlement remain confidential.
Requip
In April 2005, the Group commenced an action in the US District Court for the District of Delaware against Teva Pharmaceutical USA Inc. alleging infringement of the Group’s compound patent for ropinirole hydrochloride (the active ingredient inRequip) and a method of use patent for treatment of Parkinson’s disease, both of which are listed in the FDA Orange Book. The compound patent expired in December 2007 and the method of use patent expires in May 2008. The defendant had filed an ANDA with the FDA with a certification that those patents were invalid, unenforceable, or not infringed. In December 2006, the judge ruled at the conclusion of the trial that the Group’s patent on the method of use of ropinirole to treat Parkinson’s disease is novel and nonobvious rejecting Teva’s claims on those grounds. Teva’s original challenge to the Group’s basic compound patent was withdrawn, and Teva has accepted that the FDA will not approve its product prior to expiration of that patent. In addition, Teva has stipulated that the Group’s method of use patent is valid and enforceable and that Teva’s generic version would infringe. Teva has waived its right to appeal the December 2006 judgement in favour of the Group and has agreed to wait until the expiration of the Group’s patent in May 2008 before launching their generic product.
Valtrex
In May 2003, the Group commenced an action in the US District Court for the District of New Jersey against Ranbaxy Laboratories, alleging infringement of the Group’s compound patent for valacyclovir, the active ingredient inValtrex. That patent expires in 2009. The defendant has filed an ANDA with the FDA with a certification that the Group’s compound patent was invalid, unenforceable or not infringed. The case has been settled on terms that permit Ranbaxy to enter the market in late 2009 (taking into account expected paediatric exclusivity with respect to the Group’s basic composition of matter patent).
Wellbutrin XL
In December 2004, Biovail commenced actions in the US District Court for the Central District of California against Anchen Pharmaceuticals and in the US District Court for the Southern District of Florida against Abrika Pharmaceuticals, in each case alleging infringement of Biovail formulation patents forWellbutrin XL. In April 2005, Biovail filed an action in the US District Court for the Eastern District of Pennsylvania against Impax Laboratories for infringement of the same patents. Those patents expire in 2018. Each of Anchen, Abrika and Impax had filed an ANDA with the FDA with a certification of invalidity or non-infringement of the Biovail patents. The Group is the licensee under those patents.
In August 2006, the judge granted Anchen’s motion and ruled that Anchen’s ANDA product did not infringe Biovail’s patent. Biovail has appealed that decision to the CAFC. The Group is not a party to any of those actions. In September 2005, Biovail commenced actions in the US District Court for the Southern District of New York against Watson Laboratories alleging infringement of the Biovail formulation patents. Watson’s third party counterclaim against the Group based on listing activities associated with the FDA Orange Book was dismissed in October 2006.
In March 2007, Biovail announced, following a review by the US Federal Trade Commission (FTC) that was requested by the parties, a comprehensive settlement with Anchen Pharmaceuticals, Impax Laboratories, Watson Pharmaceuticals and Teva Pharmaceutical Industries. Certain aspects of the settlements remain confidential but the parties did disclose that, with defined exceptions, Anchen, Impax, Watson and Teva may not market a generic version of the 150mg strength ofWellbutrin XL until 2008.
The FDA has given final approval to Anchen’s ANDA for its generic version ofWellbutrin XL and to Impax for a generic 300mg tablet product. The 300mg generic product was launched in the USA at the end of December 2006. No generic version of the 150mg tablet has been launched as of the date of this report.
USPTO Action
In October 2007, the Group filed an action against the US Patent and Trademark Office in the US District Court for the Eastern District of Virginia requesting the court to enjoin the Office from implementing new regulations affecting substantive rights related to the filing and obtaining of patents. Those regulations were due to become effective on 1st November 2007. In October 2007, the court issued an order enjoining implementation of the rules until a full hearing could be held on the parties’ cross-motions for summary judgement and a final decision is rendered. That hearing was held on 8th February 2008 but no decision has been reported as of the date of this report.
Product liability
Pre-clinical and clinical trials are conducted during the development of potential products to determine the safety and efficacy of products for use by humans following approval by regulatory bodies. Notwithstanding these efforts, when drugs and vaccines are introduced into the marketplace, unanticipated side effects may become evident. The Group is currently a defendant in a number of product liability lawsuits related to the Group’s pharmaceutical products. The most significant of those matters are described below.
Avandia
In May 2007, the New England Journal of Medicine (NEJM) published an article onAvandia in which the author, based on a meta-analysis of 42 clinical trials, raises concerns that use of the drug rosiglitazone (Avandia) may be associated with an increased risk of heart attack and cardiovascular death in comparison to the use of a placebo or other anti-diabetic therapies. Following publication of the NEJM article, the Group has been named in product liability lawsuits on behalf of individuals and purported class action cases asserting consumer fraud and/or personal injury claims on behalf of purchasers and users ofAvandia. The federal cases are part of a multi-district litigation (MDL) proceeding which is pending in the US District Court for the Eastern District of Pennsylvania. Cases have also been filed in state courts. The litigation is at an early stage.
| 154 | GSK Annual Report 2007 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
44 Legal proceedingscontinued
Baycol
In August 2001, Bayer AG withdrewBaycol (cerivastatin sodium) worldwide in light of reports of adverse events, including deaths, involving rhabdomyolysis. The Group had participated in the marketing ofBaycol in the USA pursuant to a co-promotion agreement with Bayer which was the licence holder and manufacturer of the product.
Following the withdrawal, Bayer and the Group were named as defendants in thousands of lawsuits filed in state and federal courts in the USA on behalf of both individuals and putative classes of formerBaycol users. A number of the suits allege that the plaintiffs have suffered personal injuries, including rhabdomyolsis, from the use ofBaycol. Others claim that persons who tookBaycol, although not injured, may be at risk of future injury or may have suffered economic damages from purchasing and usingBaycol. Plaintiffs seek remedies including compensatory, punitive and statutory damages and creation of funds for medical monitoring.
The Group and Bayer Corporation, the principal US subsidiary of Bayer AG, have signed an allocation agreement under which Bayer Corporation has agreed to pay 95% of all settlements and compensatory damages judgements, with each party retaining responsibility for its own attorneys’ fees and any punitive damages. The federal cases have been consolidated in an MDL proceeding in the US District Court for the District of Minnesota. To date two statewide class actions have been certified – a medical monitoring case in Pennsylvania and a Consumer Fraud and Deceptive Business Practices Act case in Illinois. The medical monitoring action was dismissed by the court on summary judgement. Another class action, in which GSK was not named as a defendant, has been certified in Oklahoma. More than 3,000 claims for death or serious injury have been settled and thousands of others alleging muscle aches and pains have been voluntarily or involuntarily dismissed.
Paxil and Paxil CR
The Group has received lawsuits and claims alleging that use ofPaxil (paroxetine) during pregnancy resulted in the birth of a child with birth defects or health issues. Separately, the Group has received lawsuits and claims that patients who tookPaxil committed or attempted to commit suicide and/or acts of violence. The Group also has received lawsuits and claims filed on behalf of patients alleging that they suffered symptoms on discontinuing treatment withPaxil.
The Group has received numerous lawsuits and claims alleging that use ofPaxil during pregnancy resulted in the birth of a child with a congenital malformation or persistent pulmonary hypertension of the newborn. In September 2005, the US label forPaxilwas updated to reflect new information that suggested an increased risk of congenital malformations (particularly cardiovascular malformations) in infants born to mothers who tookPaxil during the first trimester of pregnancy. In December 2005, thePaxil US label was further updated to include new data and to strengthen the pregnancy warning from Category C to Category D, which indicates there is evidence of risk to the foetus, but the potential benefits from the use of the drug in pregnant women may outweigh the risk. In May 2006, thePaxil US label was again updated to include a class warning concerning persistent pulmonary hypertension of the newborn arising in mothers who took selective serotonin reuptake inhibitor (SSRI) antidepressants after the 20th week of pregnancy.
The Group has received numerous claims and lawsuits alleging that treatment withPaxil has caused homicidal or suicidal behaviour exhibited by users of the product. Class certification was denied in January 2007 in a purported personal injury class action lawsuit. In January 2005, the FDA approved both a boxed warning that antidepressants increased the risk of suicidal thoughts or behaviour in paediatric patients and other strengthened warnings for SSRI products, includingPaxil, as a class. In May 2006, thePaxil US label was updated to warn that young adults, especially those with Major Depressive Disorder, may be at increased risk for suicidal behaviour during treatment with paroxetine. In August 2007, FDA required updated US labels for antidepressants as a class to state in the boxed warning that antidepressants increased the risk of suicidal thinking and behaviour in children, adolescents, and young adults; that no increase was shown beyond age 24; that there was a reduction in risk in adults aged 65 and older; and that depression and other psychiatric disorders are themselves associated with increased risk.
The Group received lawsuits filed in state and federal courts in the USA and Canada on behalf of thousands of plaintiffs, including purported class actions, alleging that paroxetine (the active ingredient in Paxil) is addictive and causes dependency and withdrawal reactions. The US federal cases were consolidated in an MDL proceeding. In January 2006, a conditional settlement agreement became effective. The Group did not admit liability with respect to the allegations in the lawsuits. Virtually all the US actions have now been resolved. One purported class action consumer fraud lawsuit, focused on discontinuation symptoms, is on appeal from denial of class certification in California state court. There is purported class action litigation in Canada. The Group is also defending litigation which has commenced in the UK on behalf of hundreds of plaintiffs who allege that paroxetine has caused them to suffer from withdrawal reactions and dependency.
Thimerosal
The Group, along with a number of other pharmaceutical companies, has been named as a defendant in numerous individual personal injury lawsuits in state and federal district courts in the USA alleging that thimerosal, a preservative used in the manufacture of vaccines, causes neurodevelopmental disorders and other injuries, including autism. Two of the cases are purported class actions although there has been no determination whether any of those cases will be permitted to proceed as a class action. A number of purported class actions in other jurisdictions have been withdrawn or dismissed. Plaintiffs seek remedies including compensatory, punitive and statutory damages and the cost of a fund for medical monitoring and research. As of the date of this report, in the limited number of cases that have approached trial dates, vaccine manufacturers and manufacturers of other thimerosal-containing medicinal products have been successful in excluding testimony of plaintiffs’ expert witnesses on causation, on grounds that plaintiffs have failed to establish that the hypothesized link between thimerosal and neurodevelopmental disorders is generally accepted as reliable within the relevant scientific community. As of the date of this report there are no cases scheduled for trial in 2008 in which the Group is a defendant.
| GSK Annual Report 2007 | 155 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
44 Legal proceedingscontinued
Sales and marketing and regulation
Marketing and promotion
In February 2004, the Group received a subpoena from the US Attorney’s office in Colorado regarding the Group’s sales and promotional practices relating to nine of its largest selling products, for the period from January 1997 to the present. In particular, the government has inquired about alleged promotion of these drugs for off-label uses as well as Group sponsored continuing medical education programmes, other speaker events, special issue boards, advisory boards, speaker training programmes, clinical studies, and related grants, fees, travel and entertainment. Although the original subpoena was issued from the US Attorney’s office in Colorado, the scope of the inquiry is nationwide. The government is also inquiring about the Group’s response to an October 2002 letter from the FDA’s Division of Drug Marketing, Advertising and Communication requesting information on the Group’s alleged promotion ofWellbutrin SR for off-label use. The Group is co-operating with the investigation and providing the requested information.
In February 2003, the Verona Public Prosecutor commenced a criminal investigation into the Group’s sales and marketing practices in Italy. Specific areas of investigation include medical education programmes, clinical studies and congresses as well as the interaction between the Group’s representatives and physicians. The Public Prosecutor has proposed that a number of physicians and representatives of the Group face criminal charges and a hearing has been set for October 2008. The US Securities and Exchange Commission (SEC) staff has initiated an investigation into the allegations. The Group is co-operating with the investigations.
Following a United Nations report alleging that bribes had been paid to Iraqi government officials in connection with the UN Oil for Food Programme, the Group received a subpoena from the SEC in February 2006 in respect of the Group’s participation in that programme. The US Department of Justice also initiated an investigation. In December 2007, the UK Serious Fraud Office issued a formal notice to the Group requiring production of documents related to the Group’s participation in the programme. The Group is co-operating with the investigations and providing documents responsive to the subpoena and the notice.
Average wholesale price
GSK has responded to subpoenas from the Office of the Inspector General of the US Department of Health and Human Services (HHS), the US Department of Justice and the states of Texas and California in connection with allegations that pharmaceutical companies, including GSK, have violated federal fraud and abuse laws, such as the Federal False Claims Act and, comparable state laws with respect to Texas and California, as a result of the way ‘average wholesale price’ (AWP) was determined and reported for certain drugs and the way the Medicare and Medicaid programmes reimburse for those drugs. In September 2005, the Group reached a civil settlement with the US Department of Justice, the US Attorney for the District of Massachusetts and the Office of the Inspector General for HHS (the ‘DOJ Settlement’).
The Group agreed to pay the government a civil settlement of $149 million in respect of the marketing ofZofran andKytril, which included settlement amounts for each of the states for the claims being settled. As part of the settlement the corporate integrity agreement to which the Group is a party was amended to address issues raised in the course of the government investigation.
Subsequent to the initial subpoenas, a number of states through their respective attorneys general and most of the counties in New York state filed civil lawsuits in state and federal courts against GSK and many other drug companies. The actions claim, on behalf of the states as payers (and in some cases on behalf of in-state patients as consumers), damages and restitution due to AWP-based price reporting for pharmaceutical products covered by the states’ Medicaid programmes (and in some cases by other governmental programmes). In addition, private payer class action lawsuits were filed against GSK in multiple federal district and state courts. All the federal cases were consolidated in a MDL proceeding in the US District Court for the District of Massachusetts.
In August 2005, the judge in that MDL proceeding granted in part and denied in part the private-payer plaintiffs’ motion for class certification, thereby narrowing the scope of the class claims. In August 2006 the Group reached civil settlements to resolve the class action litigation and certain of the state attorney general claims. The Group agreed to a nationwide settlement of $70 million to resolve these claims which was approved by the trial court in August 2007. The Group separately resolved potential AWP claims by state Medicaid programmes in more than two-thirds of the states through the procedures established by the DOJ Settlement. AWP lawsuits filed or threatened by a number of state attorneys general were also fully resolved. Litigation concerning AWP issues is continuing with ten states as well as with New York counties.
Nominal pricing
The Group responded to two letter requests from the US Senate Committee on Finance, dated April 2004 and February 2005, for documents and information relating to the nominal price exception to the best price reporting requirements under the Medicaid Drug Rebate Programme. In January 2007, the committee released its findings that some pharmaceutical manufacturers inappropriately used the nominal price exception contrary to the committee’s interpretation of Congressional intent. In May 2004, the Group was advised by the US Department of Justice that they are investigating certain of the Group’s nominal pricing and bundled sales arrangements to determine whether those arrangements qualify under the exception to the best price reporting requirements or violate civil statutes or laws.
The Group is co-operating in that investigation and has provided documents and information to the Department of Justice regarding arrangements for a number of the Group’s products. In March 2007, the Group received two subpoenas from the Delaware Attorney General’s Office seeking documents related to nominal price contracts with hospitals and healthcare providers located in Delaware. Other pharmaceutical companies have received similar subpoenas. The Group is providing documents responsive to the subpoenas. In addition to these governmental investigations, allegations concerning nominal pricing have been made by certain government payers as part of the AWP litigation.
| 156 | GSK Annual Report 2007 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
44 Legal proceedingscontinued
Paxil/Seroxat
Following announcement of the New York State Attorney General’s office about the state’s lawsuit, subsequently settled in August 2004, alleging failure to disclose data on the use ofPaxil in children and adolescents, similar cases, some of which purport to be class actions, were filed in state and federal and Canadian courts by private plaintiffs seeking to recover amounts paid forPaxil purchased for use by patients under age 18. The Canadian litigation has been dismissed. The Group reached a class settlement agreement in an Illinois state court action that includes all persons in the USA who boughtPaxil for someone under age 18. The Group denies any liability. The agreement relates only to the cost of purchasingPaxil for use by paediatric patients and does not include any personal injury claims. The settlement was approved by the court in April 2007. Remaining are four lawsuits seeking recovery on behalf of insurance companies and other third-party payers for payments for prescriptions ofPaxilto children and adolescents. The Group was granted partial summary judgement dismissing class claims in one of those cases. Discovery is underway in a state court action in California pending a hearing on class certification.
In the UK an investigation remains pending by the UK Medicines and Healthcare products Regulatory Agency (MHRA) to determine whether the Group has complied with its pharmacovigilance obligations in reporting data from clinical trials forSeroxat/Paxil in children and adolescents.
Cidra, Puerto Rico manufacturing site
Following FDA inspections in October 2003 and November 2004 which resulted in observations of possible deficiencies in manufacturing practices at the Group’s manufacturing facility in Cidra, Puerto Rico, in March 2005 the FDA seized certain lots ofPaxil CR andAvandamet due to manufacturing issues. The FDA observations related to certain aspects of production controls, process validation and laboratory investigations.
In April 2005 the Group reached agreement with the FDA on a Consent Decree. The Consent Decree provides for an independent expert to review manufacturing processes at the site for compliance with FDA Good Manufacturing Practice (GMP) requirements. As provided in the Consent Decree, in September 2005 the Group provided a report to the FDA on the deficiencies identified in this review, setting out a corrective plan and timetable for completion. The Group anticipates completion of the work identified in that plan by mid-2008. In March 2007, the FDA completed a general GMP inspection which resulted in four inspectional observations. The Group has been advised by the FDA that the Group’s response to the inspectional observations is satisfactory.
In October 2007 the Group announced plans to cease operations at the Cidra site but expects to continue production ofPaxil CR at the site until that production can be transferred to another facility which the Group currently expects to take place in 2009. Production of all other products at the site was discontinued by the end of 2007.
In October 2003, the US federal government executed a search warrant at the Cidra facility and seized records relating to the manufacturing operations at the site.
In April 2005, the Group received a subpoena from the US Attorney’s Office in Boston requesting production of records regarding manufacturing at the Cidra site, covering information that is similar to that seized by the US government in Puerto Rico in 2003. Subsequently, in August 2007 and January 2008, the Group received two additional subpoenas from the government related to the Cidra facility. The Group is co-operating with the US Attorney’s Office and producing the records responsive to the subpoenas. In addition, in July 2007, the Group learned that the US District Court for the District of Massachusetts had unsealed a complaint brought by a former employee under the federal False Claims Act claiming monetary damages as a result of the alleged failure of the Cidra facility to comply with GMP in the manufacture of various products.
The Group is also named in two purported consumer fraud class action lawsuits – one filed in California state court and the other in the US District Court for the District of Puerto Rico – alleging thatPaxilproducts were not manufactured according to GMP. Plaintiffs seek economic, statutory and punitive damages, along with a request for injunctive relief. There has not yet been any determination whether either case will be permitted to proceed as a class action.
Anti-trust
Paxil/Seroxat
In the paroxetine patent infringement actions brought by the Group as described under ‘Intellectual property’ above, Apotex and certain other companies filed anti-trust and unfair competition counterclaims against the Group in the US District Court for the Eastern District of Pennsylvania. These were based on allegations that the Group monopolised a ‘market’ forPaxil by bringing allegedly sham patent litigation and allegedly abusing the regulatory procedures for the listing of patents in the FDA Orange Book. Whilst the Apotex matter remains in the discovery stage, the matters with the other companies have been resolved.
In November 2000, the FTC staff advised the Group that they were conducting a non-public investigation to determine whether the Group was violating Section 5 of the Federal Trade Commission Act by ‘monopolising or attempting to monopolise’ the ‘market’ for paroxetine hydrochloride by preventing generic competition toPaxil and requested the Group to submit certain information in connection with that investigation. In October 2003, the FTC closed its investigation on the basis of its finding that no further action was warranted. Following public reference to the FTC investigation regardingPaxil, a number of governmental and private civil actions and claims were initiated in the USA. All have been resolved with the exception of a private indirect purchaser opt-out lawsuit brought in the Minnesota courts. That matter is in the discovery phase. Additionally, class actions have been filed in provincial courts in Canada on behalf of direct and indirect purchasers. Those cases are in their early stages.
In October 2005, the Competition Directorate of the European Commission initiated an inspection concerning allegations that the Group has abused a dominant position in the marketplace concerning enforcement of its intellectual property rights, litigation surrounding regulatory approvals and marketing ofSeroxatin Europe. In October 2006, the Commission made a formal request for further information. The Group responded to this request by the end of 2006.
| GSK Annual Report 2007 | 157 |
| FINANCIAL STATEMENTS | |
| Notes to the financial statements | |
| Notes to the financial statements | |
| continued | |
44 Legal proceedingscontinued
In January 2008, the European Commission announced an inquiry into certain aspects of competition in the pharmaceutical sector and initiated inspections at the premises of a number of innovative and generic pharmaceutical companies, including the Group. The Group is co-operating with the Commission in its investigation.
Wellbutrin SR
In December 2004, January 2005 and February 2005, lawsuits, several of which purported to be class actions, were filed in the US District Court for the Eastern District of Pennsylvania against the Group on behalf of direct and indirect purchasers ofWellbutrin SR. The complaints allege violations of US anti-trust laws through sham litigation and fraud on the patent office by the Group in obtaining and enforcing patents coveringWellbutrin SR. The complaints follow the introduction of generic competition toWellbutrin SR in April 2004, after district and appellate court rulings that a generic manufacturer did not infringe the Group’s patents. The parties are involved in discovery.
Secondary wholesaler
In July 2006, RxUSA Wholesale, Inc., a ‘secondary wholesaler’, filed suit against the Group and many other pharmaceutical manufacturers and wholesalers in the US District Court for the Eastern District of New York. The complaint alleges that the defendants engaged in a conspiracy to refuse to supply pharmaceutical products to RxUSA in violation of federal and state anti-trust laws. The Group’s motion to dismiss the complaint remains pending.
Commercial and corporate
Securities class actions
In September 2005, attorneys representing a purported class of purchasers of GlaxoSmithKline shares and American Depositary Shares (ADSs) filed a second amended securities class action complaint against the Group in the US District Court for the Southern District of New York, alleging that the Group violated US securities laws through failure to disclose unfavourable clinical data from studies onPaxil, misrepresentation of the remaining patent protection forPaxil andAugmentin and violation of the Federal False Claims Act on the basis of the Group’s recent AWP settlement with the government. In October 2006, the judge entered an order dismissing the complaint. Plaintiffs filed an appeal with the US Court of Appeals for the Second Circuit. Oral argument on the appeal has been set for 5th March 2008.
In November 2007, attorneys purporting to represent a class of purchasers of GlaxoSmithKline shares and ADSs filed an amended consolidated complaint against the Group and senior officers in the US District Court for the Southern District of New York alleging that the Group and the individual defendants violated US securities laws and artificially inflated the price of GlaxoSmithKline’s stock by misleading investors about the safety ofAvandia. The amended consolidated complaint also alleges that several current and former senior officers and members of the Group engaged in insider trading. A motion to dismiss the complaint has been filed on behalf of the Group and the individual defendants.
Relenza
In May 2004, Biota Holdings Limited filed a complaint in the Victorian Supreme Court in Australia alleging that the Group had failed to fulfil its development, promotion and production obligations for zanamivir (Relenza) under the terms of the licence agreement between the Group and Biota. Biota is seeking substantial cash damages. The Group believes that it has adhered to its obligations under the licence agreement. The parties are involved in extensive discovery. The Court has ordered the parties to mediate by the end of July 2008 and has scheduled the trial to commence in August 2008.
Overtime claims
In December 2006, two purported class actions were filed against the Group on behalf of all the Group’s US pharmaceutical sales representatives. These actions, which were filed in or transferred to the US District Court for the Central District of California allege that those representatives are not ‘exempt’ employees under California law and/or the US Fair Labor Standards Act and consequently entitled to overtime pay. The suits seek double damages for all overtime allegedly worked by the Group’s sales representatives over a three-year period together with attorneys’ fees. The cases are in their early stages. Similar actions have been filed against other pharmaceutical companies. In several of those actions, courts have found in favour of the companies and dismissed the actions. Those dismissals are now on appeal.
Environmental matters
GSK has been notified of its potential responsibility relating to past operations and its past waste disposal practices at certain sites, primarily in the USA. Some of these matters are the subject of litigation, including proceedings initiated by the US federal or state governments for waste disposal site remediation costs and tort actions brought by private parties.
GSK has been advised that it may be a responsible party at approximately 29 sites, of which 14 appear on the National Priority List created by the Comprehensive Environmental Response Compensation and Liability Act (Superfund).
These proceedings seek to require the operators of hazardous waste facilities, transporters of waste to the sites and generators of hazardous waste disposed of at the sites to clean up the sites or to reimburse the government for cleanup costs. In most instances, GSK is involved as an alleged generator of hazardous waste although there are a few sites where GSK is involved as a current or former operator of the facility. Although Superfund provides that the defendants are jointly and severally liable for cleanup costs, these proceedings are frequently resolved on the basis of the nature and quantity of waste disposed of at the site by the generator. GSK’s proportionate liability for cleanup costs has been substantially determined for about 20 of the sites referred to above.
GSK’s potential liability varies greatly from site to site. While the cost of investigation, study and remediation at such sites could, over time, be substantial, GSK routinely accrues amounts related to its share of the liability for such matters.
| 158 | GSK Annual Report 2007 |
| INVESTOR INFORMATION | |
| Investor information | |
The investor information section includes the financial record presenting historical information prepared in accordance with IFRS as adopted by the European Union.
This section also discusses shareholder return, in the form of dividends and share price movements, and provides other information for shareholders.
| Financial record | |
| Quarterly trend | 160 |
| Five year record | 166 |
| Shareholder information | 169 |
| Taxation information for shareholders | 173 |
| GSK Annual Report 2007 | 159 |
Financial recordQuarterly trend
An unaudited analysis is provided by quarter of the Group results in sterling for the financial year 2004. The analysis comprises statutory results, business performance results and pharmaceutical sales by therapeutic area.area in Sterling for the financial year 2007.
| Profit and loss account – statutory | 12 months 2004 | Q4 2004 | ||||||||||
| £m | CER % | £% | £m | CER % | £% | |||||||
| Turnover – Pharmaceuticals | 17,146 | 1 | (6 | ) | 4,487 | 3 | (1 | ) | ||||
| – Consumer Healthcare | 3,213 | 3 | (1 | ) | 846 | 1 | (2 | ) | ||||
| Total turnover | 20,359 | 1 | (5 | ) | 5,333 | 3 | (1 | ) | ||||
| Cost of sales | (4,309 | ) | (1 | ) | (5 | ) | (1,158 | ) | (4 | ) | (7 | ) |
| Selling, general and administrative expenditure | (7,061 | ) | (2 | ) | (7 | ) | (2,047 | ) | 4 | 2 | ||
| Research and development expenditure | (2,839 | ) | 7 | 2 | (846 | ) | 7 | 3 | ||||
| Operating costs | (14,209 | ) | (4,051 | ) | ||||||||
| Trading profit – Pharmaceuticals | 5,530 | 1,110 | ||||||||||
| – Consumer Healthcare | 620 | 172 | ||||||||||
| Total trading profit | 6,150 | 5 | (6 | ) | 1,282 | 5 | (2 | ) | ||||
| Other operating income/(expense) | (60 | ) | 40 | |||||||||
| Operating profit | 6,090 | 6 | (4 | ) | 1,322 | 24 | 16 | |||||
| Share of profits/(losses) of joint ventures and associated undertakings | 95 | 23 | ||||||||||
| Business disposals | (1 | ) | (1 | ) | ||||||||
| Profit on disposal of interests in associates | 138 | 97 | ||||||||||
| Profit before interest | 6,322 | 1,441 | ||||||||||
| Net interest payable | (203 | ) | (51 | ) | ||||||||
| Profit on ordinary activities before taxation | 6,119 | 8 | (3 | ) | 1,390 | 34 | 24 | |||||
| Taxation | (1,701 | ) | (401 | ) | ||||||||
| Profit on ordinary activities after taxation | 4,418 | 7 | (4 | ) | 989 | 30 | 21 | |||||
| Equity minority interests | (114 | ) | (28 | ) | ||||||||
| Preference share dividends | (2 | ) | – | |||||||||
| Earnings (Profit attributable to shareholders) | 4,302 | 7 | (4 | ) | 961 | 30 | 21 | |||||
| Basic earnings per share | 75.0 | p | 8 | (3 | ) | 16.8 | p | 31 | 22 | |||
| Profit and loss account – business performance | ||||||||||||
| Turnover – Pharmaceuticals | 17,146 | 1 | (6 | ) | 4,487 | 3 | (1 | ) | ||||
| – Consumer Healthcare | 3,213 | 3 | (1 | ) | 846 | 1 | (2 | ) | ||||
| Total turnover | 20,359 | 1 | (5 | ) | 5,333 | 3 | (1 | ) | ||||
| Cost of sales | (4,309 | ) | 7 | 3 | (1,158 | ) | 7 | 4 | ||||
| Selling, general and administrative expenditure | (7,061 | ) | (2 | ) | (7 | ) | (2,047 | ) | 6 | 4 | ||
| Research and development expenditure | (2,839 | ) | 8 | 2 | (846 | ) | 8 | 4 | ||||
| Operating costs | (14,209 | ) | (4,051 | ) | ||||||||
| Trading profit – Pharmaceuticals | 5,530 | 1,110 | ||||||||||
| – Consumer Healthcare | 620 | 172 | ||||||||||
| Total trading profit | 6,150 | (1 | ) | (11 | ) | 1,282 | (7 | ) | (13 | ) | ||
| Other operating income/(expense) | (60 | ) | 40 | |||||||||
| Operating profit | 6,090 | – | (10 | ) | 1,322 | 8 | 1 | |||||
| Share of profits/(losses) of joint ventures and associated undertakings | 95 | 23 | ||||||||||
| Business disposals | (1 | ) | (1 | ) | ||||||||
| Profit on disposal of interest in associates | 138 | 97 | ||||||||||
| Profit before interest | 6,322 | 1,441 | ||||||||||
| Net interest payable | (203 | ) | (51 | ) | ||||||||
| Profit on ordinary activities before taxation | 6,119 | 2 | (9 | ) | 1,390 | 17 | 8 | |||||
| Taxation | (1,701 | ) | (401 | ) | ||||||||
| Profit on ordinary activities after taxation | 4,418 | 1 | (9 | ) | 989 | 14 | 6 | |||||
| Equity minority interests | (114 | ) | (28 | ) | ||||||||
| Preference share dividends | (2 | ) | – | |||||||||
| Adjusted earnings (Profit attributable to shareholders) | 4,302 | 1 | (10 | ) | 961 | 14 | 6 | |||||
| Adjusted earnings per share | 75.0 | p | 16.8 | p | ||||||||
| Income statement – total | 12 months 2007 | Q4 2007 | ||||||||||
| £m | CER% | £% | £m | CER% | £% | |||||||
| Turnover – Pharmaceuticals | 19,233 | – | (4 | ) | 5,047 | (2 | ) | (2 | ) | |||
| �� – Consumer Healthcare | 3,483 | 14 | 11 | 927 | 11 | 13 | ||||||
| Total turnover | 22,716 | 2 | (2 | ) | 5,974 | – | – | |||||
| Cost of sales | (5,317 | ) | 8 | 6 | (1,639 | ) | 13 | 13 | ||||
| Selling, general and administrative | (6,954 | ) | – | (4 | ) | (1,823 | ) | (6 | ) | (6 | ) | |
| Research and development | (3,327 | ) | (1 | ) | (4 | ) | (1,043 | ) | 7 | 6 | ||
| Other operating income | 475 | 119 | ||||||||||
| Operating profit | 7,593 | 3 | (3 | ) | 1,588 | (7 | ) | (7 | ) | |||
| Finance income | 262 | 52 | ||||||||||
| Finance costs | (453 | ) | (119 | ) | ||||||||
| Share of after tax profits of associates and joint ventures | 50 | 10 | ||||||||||
| Profit before taxation | 7,452 | 2 | (4 | ) | 1,531 | (11 | ) | (10 | ) | |||
| Taxation | (2,142 | ) | (455 | ) | ||||||||
| Tax rate % | 28.7 | % | 29.7 | % | ||||||||
| Profit after taxation for the period | 5,310 | 3 | (3 | ) | 1,076 | (11 | ) | (11 | ) | |||
| Profit attributable to minority interests | 96 | 19 | ||||||||||
| Profit attributable to shareholders | 5,214 | 1,057 | ||||||||||
| Basic earnings per share (pence) | 94.4 | p | 5 | (1 | ) | 19.6 | p | (7 | ) | (7 | ) | |
| Diluted earnings per share (pence) | 93.7 | p | 19.4 | p | ||||||||
| Income statement – business performance | ||||||||||||
| Turnover – Pharmaceuticals | 19,233 | – | (4 | ) | 5,047 | (2 | ) | (2 | ) | |||
| – Consumer Healthcare | 3,483 | 14 | 11 | 927 | 11 | 13 | ||||||
| Total turnover | 22,716 | 2 | (2 | ) | 5,974 | – | – | |||||
| Cost of sales | (5,206 | ) | 6 | 4 | (1,528 | ) | 5 | 6 | ||||
| Selling, general and administrative | (6,817 | ) | (2 | ) | (6 | ) | (1,686 | ) | (13 | ) | (13 | ) |
| Research and development | (3,237 | ) | (3 | ) | (6 | ) | (953 | ) | (2 | ) | (3 | ) |
| Other operating income | 475 | 119 | ||||||||||
| Operating profit | 7,931 | 8 | 2 | 1,926 | 14 | 13 | ||||||
| Finance income | 262 | 52 | ||||||||||
| Finance costs | (453 | ) | (119 | ) | ||||||||
| Share of after tax profits of associates and joint ventures | 50 | 10 | ||||||||||
| Profit before taxation | 7,790 | 6 | – | 1,869 | 10 | 9 | ||||||
| Taxation | (2,219 | ) | (532 | ) | ||||||||
| Tax rate % | 28.5 | % | 28.5 | % | ||||||||
| Profit after taxation for the period | 5,571 | 8 | 1 | 1,337 | 12 | 11 | ||||||
| Profit attributable to minority interests | 96 | 19 | ||||||||||
| Profit attributable to shareholders | 5,475 | 1,318 | ||||||||||
| Adjusted earnings per share (pence) | 99.1 | p | 10 | 4 | 24.4 | p | 17 | 16 | ||||
| Diluted earnings per share (pence) | 98.3 | p | 24.2 | p | ||||||||
The calculation of business performance, a supplemental non-IFRS measure, is described in Note 1 to the financial statements, ‘Presentation of the financial statements’.
| 160 | GSK Annual Report 2007 |
| INVESTOR INFORMATION | ||
| Financial record | ||
| Financial record | ||
| continued | ||
| 9 months 2004 | Q3 2004 | 6 months 2004 | Q2 2004 | Q1 2004 | ||||||||||||||||||||||||||
| £m | CER % | £% | £m | CER % | £% | £m | CER % | £% | £m | CER % | £% | £m | CER % | £% | ||||||||||||||||
| 12,659 | – | (7 | ) | 4,213 | (1 | ) | (9 | ) | 8,446 | 1 | (6 | ) | 4,266 | 1 | (7 | ) | 4,180 | 1 | (6 | ) | ||||||||||
| 2,367 | 4 | (1 | ) | 806 | 3 | (3 | ) | 1,561 | 5 | – | 798 | 4 | (1 | ) | 763 | 6 | 1 | |||||||||||||
| 15,026 | 1 | (6 | ) | 5,019 | – | (8 | ) | 10,007 | 2 | (6 | ) | 5,064 | 2 | (6 | ) | 4,943 | 2 | (5 | ) | |||||||||||
| (3,151 | ) | – | (5 | ) | (1,096 | ) | 2 | (3 | ) | (2,055 | ) | (2 | ) | (6 | ) | (1,031 | ) | 1 | (3 | ) | (1,024 | ) | (4 | ) | (8 | ) | ||||
| (5,014 | ) | (4 | ) | (10 | ) | (1,647 | ) | (10 | ) | (15 | ) | (3,367 | ) | (1 | ) | (8 | ) | (1,641 | ) | (3 | ) | (12 | ) | (1,726 | ) | 2 | (3 | ) | ||
| (1,993 | ) | 7 | 1 | (682 | ) | 6 | – | (1,311 | ) | 7 | 2 | (680 | ) | 9 | 4 | (631 | ) | 5 | – | |||||||||||
| (10,158 | ) | (3,425 | ) | (6,733 | ) | (3,352 | ) | (3,381 | ) | |||||||||||||||||||||
| 4,420 | 1,412 | 3,008 | 1,557 | 1,451 | ||||||||||||||||||||||||||
| 448 | 182 | 266 | 155 | 111 | ||||||||||||||||||||||||||
| 4,868 | 5 | (6 | ) | 1,594 | 7 | (7 | ) | 3,274 | 4 | (6 | ) | 1,712 | 4 | (5 | ) | 1,562 | 4 | (8 | ) | |||||||||||
| (100 | ) | (33 | ) | (67 | ) | (102 | ) | 35 | ||||||||||||||||||||||
| 4,768 | 2 | (9 | ) | 1,561 | 7 | (7 | ) | 3,207 | – | (10 | ) | 1,610 | (7 | ) | (14 | ) | 1,597 | 7 | (4 | ) | ||||||||||
| 72 | 22 | 50 | 28 | 22 | ||||||||||||||||||||||||||
| – | – | – | – | – | ||||||||||||||||||||||||||
| 41 | – | 41 | 41 | – | ||||||||||||||||||||||||||
| 4,881 | 1,583 | 3,298 | 1,679 | 1,619 | ||||||||||||||||||||||||||
| (152 | ) | (61 | ) | (91 | ) | (48 | ) | (43 | ) | |||||||||||||||||||||
| 4,729 | 2 | (9 | ) | 1,522 | 6 | (8 | ) | 3,207 | – | (9 | ) | 1,631 | (6 | ) | (13 | ) | 1,576 | 7 | (5 | ) | ||||||||||
| (1,300 | ) | (418 | ) | (882 | ) | (449 | ) | (433 | ) | |||||||||||||||||||||
| 3,429 | 2 | (9 | ) | 1,104 | 6 | (8 | ) | 2,325 | – | (9 | ) | 1,182 | (5 | ) | (13 | ) | 1,143 | 7 | (6 | ) | ||||||||||
| (86 | ) | (39 | ) | (47 | ) | (25 | ) | (22 | ) | |||||||||||||||||||||
| (2 | ) | – | (2 | ) | – | (2 | ) | |||||||||||||||||||||||
| 3,341 | 2 | (9 | ) | 1,065 | 6 | (9 | ) | 2,276 | – | (9 | ) | 1,157 | (5 | ) | (13 | ) | 1,119 | 7 | (6 | ) | ||||||||||
| 58.2 | p | 3 | (8 | ) | 18.7 | p | 7 | (7 | ) | 39.5 | p | 1 | (8 | ) | 20.1 | p | (4 | ) | (12 | ) | 19.4 | p | ||||||||
| 12,659 | – | (7 | ) | 4,213 | (1 | ) | (9 | ) | 8,446 | 1 | (6 | ) | 4,266 | 1 | (7 | ) | 4,180 | 1 | (6 | ) | ||||||||||
| 2,367 | 4 | (1 | ) | 806 | 3 | (3 | ) | 1,561 | 5 | – | 798 | 4 | (1 | ) | 763 | 6 | 1 | |||||||||||||
| 15,026 | 1 | (6 | ) | 5,019 | – | (8 | ) | 10,007 | 2 | (6 | ) | 5,064 | 2 | (6 | ) | 4,943 | 2 | (5 | ) | |||||||||||
| (3,151 | ) | 7 | 3 | (1,096 | ) | 8 | 3 | (2,055 | ) | 6 | 2 | (1,031 | ) | 9 | 4 | (1,024 | ) | 4 | – | |||||||||||
| (5,014 | ) | (4 | ) | (10 | ) | (1,647 | ) | (12 | ) | (16 | ) | (3,367 | ) | – | (7 | ) | (1,641 | ) | (3 | ) | (12 | ) | (1,726 | ) | 2 | (3 | ) | |||
| (1,993 | ) | 8 | 2 | (682 | ) | 6 | – | (1,311 | ) | 8 | 3 | (680 | ) | 11 | 6 | (631 | ) | 6 | – | |||||||||||
| (10,158 | ) | (3,425 | ) | (6,733 | ) | (3,352 | ) | (3,381 | ) | |||||||||||||||||||||
| 4,420 | 1,412 | 3,008 | 1,557 | 1,451 | ||||||||||||||||||||||||||
| 448 | 182 | 266 | 155 | 111 | ||||||||||||||||||||||||||
| 4,868 | 1 | (10 | ) | 1,594 | 5 | (9 | ) | 3,274 | (1 | ) | (11 | ) | 1,712 | (1 | ) | (9 | ) | 1,562 | (2 | ) | (13 | ) | ||||||||
| (100 | ) | (33 | ) | (67 | ) | (102 | ) | 35 | ||||||||||||||||||||||
| 4,768 | (2 | ) | (13 | ) | 1,561 | 5 | (9 | ) | 3,207 | (6 | ) | (14 | ) | 1,610 | (12 | ) | (18 | ) | 1,597 | 1 | (10 | ) | ||||||||
| 72 | 22 | 50 | 28 | 22 | ||||||||||||||||||||||||||
| – | – | – | – | – | ||||||||||||||||||||||||||
| 41 | – | 41 | 41 | – | ||||||||||||||||||||||||||
| 4,881 | 1,583 | 3,298 | 1,679 | 1,619 | ||||||||||||||||||||||||||
| (152 | ) | (61 | ) | (91 | ) | (48 | ) | (43 | ) | |||||||||||||||||||||
| 4,729 | (2 | ) | (13 | ) | 1,522 | 4 | (10 | ) | 3,207 | (5 | ) | (14 | ) | 1,631 | (10 | ) | (17 | ) | 1,576 | 1 | (11 | ) | ||||||||
| (1,300 | ) | (418 | ) | (882 | ) | (449 | ) | (433 | ) | |||||||||||||||||||||
| 3,429 | (2 | ) | (13 | ) | 1,104 | 4 | (10 | ) | 2,325 | (5 | ) | (14 | ) | 1,182 | (9 | ) | (17 | ) | 1,143 | – | (11 | ) | ||||||||
| (86 | ) | (39 | ) | (47 | ) | (25 | ) | (22 | ) | |||||||||||||||||||||
| (2 | ) | – | 2 | – | (2 | ) | ||||||||||||||||||||||||
| 3,341 | (2 | ) | (13 | ) | 1,065 | 4 | (11 | ) | 2,276 | (5 | ) | (14 | ) | 1,157 | (10 | ) | (17 | ) | 1,119 | – | (11 | ) | ||||||||
| 58.2 | p | 18.7 | p | 39.5 | p | 20.1 | p | 19.4 | p | |||||||||||||||||||||
| Q3 2007 | Q2 2007 | Q1 2007 | |||||||||||||||
| £m | CER% | £% | £m | CER% | £% | £m | CER% | £% | |||||||||
| 4,605 | (2 | ) | (6 | ) | 4,775 | – | (5 | ) | 4,806 | 3 | (5 | ) | |||||
| 871 | 16 | 14 | 899 | 18 | 14 | 786 | 9 | 2 | |||||||||
| 5,476 | 1 | (3 | ) | 5,674 | 3 | (2 | ) | 5,592 | 4 | (4 | ) | ||||||
| (1,232 | ) | 2 | 1 | (1,212 | ) | 3 | – | (1,234 | ) | 14 | 9 | ||||||
| (1,617 | ) | 3 | – | (1,841 | ) | 3 | (2 | ) | (1,673 | ) | (1 | ) | (8 | ) | |||
| (769 | ) | (9 | ) | (12 | ) | (789 | ) | (4 | ) | (8 | ) | (726 | ) | 2 | (4 | ) | |
| 52 | 97 | 207 | |||||||||||||||
| 1,910 | (1 | ) | (6 | ) | 1,929 | 9 | 1 | 2,166 | 11 | – | |||||||
| 75 | 77 | 58 | |||||||||||||||
| (117 | ) | (121 | ) | (96 | ) | ||||||||||||
| 14 | 11 | 15 | |||||||||||||||
| 1,882 | (2 | ) | (7 | ) | 1,896 | 8 | – | 2,143 | 10 | 1 | |||||||
| (536 | ) | (541 | ) | (610 | ) | ||||||||||||
| 28.5 | % | 28.5 | % | 28.5 | % | ||||||||||||
| 1,346 | (1 | ) | (6 | ) | 1,355 | 10 | 1 | 1,533 | 11 | – | |||||||
| 36 | 22 | 19 | |||||||||||||||
| 1,310 | 1,333 | 1,514 | |||||||||||||||
| 23.7 | p | 1 | (4 | ) | 24.0 | p | 11 | 3 | 27.0 | p | 14 | 2 | |||||
| 23.5 | p | 23.7 | p | 26.7 | p | ||||||||||||
| GSK Annual Report 2007 | 161 |
| Financial record | |
| Financial record | |
| continued | |
Pharmaceutical turnover – total Group Q4 2004 Q3 2004 Q2 2004 Q1 2004 £m CER % £% £m CER % £% £m CER % £% £m CER % £% Respiratory 1,173 4 – 1,070 10 1 1,086 6 (1 ) 1,086 7 (1 ) Seretide/Advair, Flixotide/Flovent, Serevent 920 5 2 832 10 2 852 12 5 824 8 1 Seretide/Advair 668 13 8 609 20 10 603 22 14 581 22 13 Flixotide/Flovent 167 (8 ) (10 ) 141 (8 ) (15 ) 156 (3 ) (10 ) 154 (9 ) (14 ) Serevent 85 (17 ) (17 ) 82 (13 ) (19 ) 93 (9 ) (15 ) 89 (21 ) (26 ) Flixonase/Flonase 143 5 (1 ) 145 28 14 133 (11 ) (19 ) 157 11 (1 ) Central Nervous System 837 (9 ) (13 ) 835 (26 ) (33 ) 877 (17 ) (24 ) 914 (8 ) (17 ) Seroxat/Paxil 242 (23 ) (26 ) 246 (51 ) (55 ) 284 (41 ) (45 ) 291 (36 ) (41 ) Paxil IR 144 (34 ) (35 ) 144 (65 ) (67 ) 189 (54 ) (56 ) 190 (51 ) (53 ) Paxil CR 98 1 (6 ) 102 4 (7 ) 95 21 8 101 37 20 Wellbutrin 164 (24 ) (28 ) 173 (30 ) (38 ) 193 (7 ) (16 ) 221 17 2 Wellbutrin IR, SR 30 (85 ) (84 ) 45 (79 ) (82 ) 76 (64 ) (67 ) 133 (30 ) (38 ) Wellbutrin XL 134 >100 >100 128 >100 >100 117 >100 – 88 >100 >100 Imigran/Imitrex 177 – (6 ) 175 (3 ) (12 ) 158 (9 ) (17 ) 172 4 (6 ) Lamictal 182 31 25 172 29 19 171 38 27 153 29 18 Requip 32 23 19 29 22 12 29 29 21 26 24 18 Anti-virals 606 8 4 597 11 2 595 6 (2 ) 562 6 (2 ) HIV 375 6 2 372 8 (1 ) 368 2 (6 ) 348 – (7 ) Combivir 147 4 – 144 7 (1 ) 141 – (7 ) 139 4 (3 ) Trizivir 75 (12 ) (15 ) 79 (6 ) (14 ) 87 (7 ) (15 ) 81 (8 ) (14 ) Epivir 73 8 4 73 6 (3 ) 77 11 4 71 4 (4 ) Ziagen 38 1 (3 ) 42 7 (2 ) 37 (2 ) (12 ) 38 (7 ) (12 ) Retrovir 11 8 – 11 5 – 11 – (8 ) 10 (4 ) (9 ) Agenerase, Lexiva 21 66 62 18 >100 >100 15 >100 88 9 9 – Herpes 183 14 8 179 15 5 182 10 2 174 23 15 Valtrex 146 20 13 147 27 15 145 19 10 133 31 21 Zovirax 37 (6 ) (10 ) 32 (21 ) (24 ) 37 (15 ) (20 ) 41 3 – Zeffix 34 – – 33 13 3 33 14 3 30 4 (3 ) Anti-bacterials 396 (20 ) (22 ) 353 (10 ) (16 ) 386 (1 ) (8 ) 426 (4 ) (9 ) Augmentin 170 (30 ) (32 ) 156 (7 ) (12 ) 178 6 (1 ) 204 – (6 ) Augmentin IR 135 (17 ) (19 ) 125 (9 ) (13 ) 134 11 6 139 (3 ) (6 ) Augmentin ES 5 (93 ) (90 ) 14 32 17 22 (18 ) (30 ) 33 (15 ) (25 ) Augmentin XR 30 (12 ) (17 ) 17 (12 ) (19 ) 22 (10 ) – 32 41 23 Zinnat/Ceftin 58 (15 ) (17 ) 45 (16 ) (21 ) 52 1 (5 ) 63 2 (2 ) Metabolic 324 18 11 320 25 13 339 52 38 270 16 4 Avandia/Avandamet 287 21 14 284 31 18 307 59 45 238 18 5 Vaccines 350 23 21 328 22 15 278 4 (2 ) 240 (6 ) (9 ) Hepatitis 109 10 7 102 7 – 105 6 (1 ) 90 (11 ) (16 ) Infanrix/Pediarix 100 35 32 95 22 14 86 (9 ) (16 ) 76 6 1 Oncology and emesis 229 5 (1 ) 246 9 (1 ) 237 (5 ) (13 ) 222 (1 ) (10 ) Zofran 190 7 2 201 12 1 192 2 (7 ) 180 10 (1 ) Hycamtin 24 (7 ) (8 ) 26 – (10 ) 25 (5 ) (14 ) 24 1 (8 ) Cardiovascular and urogenital 280 50 44 233 14 3 220 35 24 200 27 16 Coreg 115 29 20 110 29 13 113 50 35 94 27 12 Levitra 12 78 71 11 (53 ) (56 ) 9 >100 >100 17 >100 >100 Avodart 23 >100 >100 17 >100 >100 14 >100 >100 10 >100 >100 Other 292 8 4 231 (13 ) (20 ) 248 (14 ) (19 ) 260 (6 ) (12 ) Zantac 69 (6 ) (9 ) 66 (12 ) (18 ) 70 (15 ) (21 ) 68 (14 ) (18 ) Total 4,487 3 (1 ) 4,213 (1 ) (9 ) 4,266 1 (7 ) 4,180 1 (6 )
| Q4 2007 | Q3 2007 | Q2 2007 | Q1 2007 | |||||||||||||||||||||
| £m | CER% | £% | £m | CER% | £% | £m | CER% | £% | £m | CER% | £% | |||||||||||||
| Respiratory | 1,363 | 8 | 7 | 1,185 | 4 | – | 1,260 | 8 | 2 | 1,224 | 1 | (6 | ) | |||||||||||
| Seretide/Advair | 958 | 12 | 11 | 835 | 7 | 3 | 871 | 12 | 6 | 835 | 11 | 2 | ||||||||||||
| Flixotide/Flovent | 175 | 2 | 2 | 140 | 1 | (3 | ) | 151 | (2 | ) | (8 | ) | 155 | (4 | ) | (13 | ) | |||||||
| Serevent | 71 | (5 | ) | (4 | ) | 63 | (6 | ) | (9 | ) | 70 | (1 | ) | (5 | ) | 65 | (5 | ) | (12 | ) | ||||
| Flixonase/Flonase | 32 | (35 | ) | (33 | ) | 49 | (23 | ) | (23 | ) | 55 | (15 | ) | (19 | ) | 63 | (49 | ) | (52 | ) | ||||
| Central nervous system | 899 | 1 | (2 | ) | 825 | (4 | ) | (10 | ) | 828 | (3 | ) | (10 | ) | 796 | (2 | ) | (11 | ) | |||||
| Seroxat/Paxil | 151 | (7 | ) | (7 | ) | 128 | (2 | ) | (7 | ) | 140 | (4 | ) | (12 | ) | 134 | (9 | ) | (17 | ) | ||||
| Paxil IR | 112 | (2 | ) | (1 | ) | 92 | (7 | ) | (11 | ) | 103 | (8 | ) | (16 | ) | 93 | (8 | ) | (15 | ) | ||||
| Paxil CR | 39 | (18 | ) | (22 | ) | 36 | 12 | 6 | 37 | 8 | – | 41 | (10 | ) | (20 | ) | ||||||||
| Wellbutrin | 130 | (36 | ) | (39 | ) | 135 | (38 | ) | (42 | ) | 132 | (40 | ) | (44 | ) | 132 | (33 | ) | (39 | ) | ||||
| Wellbutrin IR, SR | 16 | (32 | ) | (36 | ) | 21 | (15 | ) | (19 | ) | 15 | (41 | ) | (44 | ) | 23 | – | (4 | ) | |||||
| Wellbutrin XL | 114 | (36 | ) | (39 | ) | 114 | (41 | ) | (45 | ) | 117 | (40 | ) | (44 | ) | 109 | (37 | ) | (44 | ) | ||||
| Imigran/Imitrex | 187 | 11 | 7 | 165 | (2 | ) | (8 | ) | 167 | 2 | (5 | ) | 166 | 1 | (9 | ) | ||||||||
| Lamictal | 301 | 21 | 17 | 275 | 14 | 7 | 271 | 18 | 11 | 250 | 11 | 5 | ||||||||||||
| Requip | 95 | 26 | 25 | 87 | 31 | 24 | 84 | 41 | 31 | 80 | 50 | 38 | ||||||||||||
| Anti-virals | 791 | 13 | 12 | 714 | 6 | 2 | 755 | 11 | 5 | 768 | 20 | 10 | ||||||||||||
| HIV | 359 | (1 | ) | – | 360 | 3 | (1 | ) | 364 | (3 | ) | (7 | ) | 359 | (3 | ) | (10 | ) | ||||||
| Combivir | 108 | (10 | ) | (9 | ) | 115 | (4 | ) | (8 | ) | 117 | (13 | ) | (17 | ) | 115 | (13 | ) | (20 | ) | ||||
| Trizivir | 56 | (10 | ) | (8 | ) | 55 | (8 | ) | (13 | ) | 60 | (13 | ) | (17 | ) | 62 | (7 | ) | (14 | ) | ||||
| Epivir | 37 | (16 | ) | (14 | ) | 38 | (13 | ) | (17 | ) | 40 | (21 | ) | (25 | ) | 41 | (27 | ) | (32 | ) | ||||
| Ziagen | 28 | (4 | ) | – | 28 | 4 | – | 27 | (3 | ) | (7 | ) | 26 | (9 | ) | (19 | ) | |||||||
| Agenerase, Lexiva | 36 | 9 | 6 | 37 | 19 | 16 | 33 | 9 | 3 | 35 | 15 | 6 | ||||||||||||
| Epzicom/Kivexa | 90 | 29 | 30 | 80 | 33 | 27 | 79 | 43 | 36 | 75 | 57 | 47 | ||||||||||||
| Herpes | 283 | 19 | 17 | 256 | 12 | 6 | 252 | 11 | 3 | 250 | 17 | 6 | ||||||||||||
| Valtrex | 255 | 23 | 20 | 229 | 13 | 7 | 226 | 14 | 6 | 224 | 22 | 10 | ||||||||||||
| Zovirax | 28 | (10 | ) | (7 | ) | 27 | 4 | – | 26 | (10 | ) | (16 | ) | 26 | (13 | ) | (19 | ) | ||||||
| Zeffix | 42 | (2 | ) | – | 42 | 5 | – | 44 | 15 | 10 | 40 | 16 | 5 | |||||||||||
| Relenza | 75 | >100 | >100 | 28 | (7 | ) | (7 | ) | 67 | >100 | >100 | 92 | >100 | >100 | ||||||||||
| Metabolic | 321 | (33 | ) | (32 | ) | 297 | (29 | ) | (32 | ) | 420 | (16 | ) | (21 | ) | 476 | 21 | 10 | ||||||
| Avandia | 160 | (52 | ) | (51 | ) | 153 | (51 | ) | (53 | ) | 249 | (35 | ) | (39 | ) | 315 | 1 | (8 | ) | |||||
| Avandamet | 64 | (7 | ) | (6 | ) | 60 | 39 | 36 | 85 | 41 | 33 | 83 | >100 | >100 | ||||||||||
| Avandaryl | 7 | (57 | ) | (50 | ) | 12 | 18 | 9 | 15 | >100 | >100 | 16 | 50 | 33 | ||||||||||
| Bonviva/Boniva | 52 | 59 | 53 | 41 | 56 | 52 | 36 | >100 | 89 | 32 | >100 | >100 | ||||||||||||
| Vaccines | 634 | 18 | 20 | 593 | 49 | 44 | 398 | 6 | 3 | 368 | 6 | 1 | ||||||||||||
| Hepatitis | 147 | 13 | 15 | 141 | 29 | 24 | 128 | 10 | 6 | 113 | 4 | (3 | ) | |||||||||||
| Influenza | 174 | 62 | 63 | 141 | >100 | >100 | 4 | (43 | ) | (43 | ) | 1 | – | – | ||||||||||
| Infanrix, Pediarix | 137 | (2 | ) | 1 | 137 | 16 | 12 | 135 | 9 | 5 | 134 | 15 | 8 | |||||||||||
| Boostrix | 13 | (28 | ) | (28 | ) | 26 | 56 | 44 | 14 | – | – | 13 | 40 | 30 | ||||||||||
| Rotarix | 39 | 70 | 70 | 23 | >100 | >100 | 15 | >100 | >100 | 14 | >100 | 100 | ||||||||||||
| Cervarix | 9 | – | – | 1 | – | – | – | – | – | – | – | – | ||||||||||||
| Cardiovascular and urogenital | 298 | (31 | ) | (29 | ) | 378 | (2 | ) | (7 | ) | 439 | 22 | 15 | 439 | 13 | 3 | ||||||||
| Coreg | 23 | (91 | ) | (88 | ) | 145 | (20 | ) | (26 | ) | 202 | 37 | 26 | 217 | 8 | (4 | ) | |||||||
| Coreg CR | 33 | – | – | 31 | – | – | 10 | – | – | 14 | – | – | ||||||||||||
| Coreg IR | (10 | ) | – | – | 114 | (37 | ) | (42 | ) | 192 | 30 | 20 | 203 | 1 | (10 | ) | ||||||||
| Levitra | 11 | – | (8 | ) | 13 | 18 | 18 | 11 | 44 | 22 | 14 | 36 | 27 | |||||||||||
| Avodart | 83 | 36 | 36 | 72 | 33 | 26 | 67 | 39 | 31 | 63 | 47 | 34 | ||||||||||||
| Arixtra | 29 | 43 | 38 | 25 | 100 | 92 | 26 | >100 | 100 | 20 | 100 | 82 | ||||||||||||
| Fraxiparine | 51 | (9 | ) | (4 | ) | 41 | (16 | ) | (16 | ) | 45 | (18 | ) | (20 | ) | 47 | (6 | ) | (8 | ) | ||||
| Vesicare | 14 | 67 | 56 | 13 | 56 | 44 | 12 | 86 | 71 | 11 | 71 | 57 | ||||||||||||
| Anti-bacterials | 370 | 2 | 5 | 302 | (2 | ) | (3 | ) | 310 | (2 | ) | (5 | ) | 348 | (3 | ) | (8 | ) | ||||||
| Augmentin | 146 | (2 | ) | 1 | 117 | (2 | ) | (3 | ) | 120 | (8 | ) | (10 | ) | 147 | (9 | ) | (14 | ) | |||||
| Oncology and emesis | 100 | (54 | ) | (53 | ) | 104 | (61 | ) | (63 | ) | 126 | (55 | ) | (56 | ) | 147 | (45 | ) | (49 | ) | ||||
| Zofran | 22 | (88 | ) | (87 | ) | 32 | (86 | ) | (86 | ) | 55 | (76 | ) | (76 | ) | 87 | (60 | ) | (62 | ) | ||||
| Hycamtin | 31 | 11 | 11 | 30 | 11 | 7 | 28 | 4 | – | 30 | 14 | 3 | ||||||||||||
| Tykerb | 19 | – | – | 16 | – | – | 12 | – | – | 4 | – | – | ||||||||||||
| Other | 271 | 4 | 5 | 207 | (9 | ) | (10 | ) | 239 | 3 | – | 240 | 5 | (4 | ) | |||||||||
| Zantac | 43 | (22 | ) | (22 | ) | 37 | (25 | ) | (27 | ) | 40 | (31 | ) | (34 | ) | 48 | (18 | ) | (26 | ) | ||||
| Total | 5,047 | (2 | ) | (2 | ) | 4,605 | (2 | ) | (6 | ). | 4,775 | – | (5 | ) | 4,806 | 3 | (5 | ) | ||||||
Pharmaceutical turnover includes co-promotion income.
| 162 | GSK Annual Report 2007 |
| INVESTOR INFORMATION | |
| Financial record | |
| Financial record | |
Pharmaceutical turnover – USUSA
| Q4 2004 | Q3 2004 | Q2 2004 | Q1 2004 | Q4 2007 | Q3 2007 | Q2 2007 | Q1 2007 | |||||||||||||||||||||||||||||||||||||||||||||
| £m | CER % | £% | £m | CER % | £% | £m | CER % | £% | £m | CER % | £% | £m | CER% | £% | £m | CER% | £% | £m | CER% | £% | £m | CER% | £% | |||||||||||||||||||||||||||||
| Respiratory | 568 | 7 | – | 556 | 15 | 2 | 511 | 3 | (8 | ) | 548 | 10 | (4 | ) | 632 | 7 | 3 | 570 | 4 | (4 | ) | 593 | 10 | 2 | 582 | (3 | ) | (13 | ) | |||||||||||||||||||||||
| Seretide/Advair | 513 | 9 | 4 | 452 | 5 | (3 | ) | 467 | 11 | 3 | 459 | 12 | – | |||||||||||||||||||||||||||||||||||||||
Flixotide/Flovent, Serevent | 458 | 8 | – | 431 | 12 | (1 | ) | 405 | 9 | (2 | ) | 416 | 7 | (6 | ) | |||||||||||||||||||||||||||||||||||||
| Seretide/Advair | 367 | 16 | 8 | 342 | 22 | 8 | 304 | 18 | 6 | 317 | 24 | 9 | ||||||||||||||||||||||||||||||||||||||||
| Flixotide/Flovent | 64 | (11 | ) | (17 | ) | 59 | (13 | ) | (23 | ) | 65 | (6 | ) | (16 | ) | 63 | (18 | ) | (28 | ) | 81 | 8 | 3 | 67 | 13 | 5 | 65 | 3 | (6 | ) | 71 | (8 | ) | (17 | ) | |||||||||||||||||
| Serevent | 27 | (25 | ) | (29 | ) | 30 | (22 | ) | (32 | ) | 36 | (20 | ) | (28 | ) | 36 | (36 | ) | (44 | ) | 19 | (9 | ) | (14 | ) | 18 | (5 | ) | (10 | ) | 18 | (5 | ) | (14 | ) | 19 | (9 | ) | (17 | ) | ||||||||||||
| Flixonase/Flonase | 105 | 2 | (4 | ) | 119 | 32 | 16 | 100 | (15 | ) | (24 | ) | 126 | 22 | 7 | 1 | – | – | 21 | (41 | ) | (46 | ) | 25 | (26 | ) | (26 | ) | 25 | (72 | ) | (73 | ) | |||||||||||||||||||
| Central Nervous System | 536 | (6 | ) | (12 | ) | 544 | (32 | ) | (40 | ) | 579 | (20 | ) | (28 | ) | 612 | (11 | ) | (22 | ) | ||||||||||||||||||||||||||||||||
| Central nervous system | 637 | 1 | (3 | ) | 589 | (4 | ) | (11 | ) | 586 | (2 | ) | (9 | ) | 565 | 1 | (9 | ) | ||||||||||||||||||||||||||||||||||
| Seroxat/Paxil | 108 | (20 | ) | (25 | ) | 117 | (64 | ) | (68 | ) | 146 | (52 | ) | (57 | ) | 148 | (48 | ) | (55 | ) | 39 | (18 | ) | (20 | ) | 33 | 9 | – | 34 | (8 | ) | (15 | ) | 37 | (23 | ) | (30 | ) | ||||||||||||||
| Paxil IR | 13 | (69 | ) | (68 | ) | 17 | (92 | ) | (93 | ) | 53 | (77 | ) | (79 | ) | 48 | (77 | ) | (80 | ) | 5 | 33 | 67 | – | – | – | 2 | (75 | ) | (75 | ) | – | – | – | ||||||||||||||||||
| Paxil CR | 95 | (1 | ) | (8 | ) | 100 | 2 | (9 | ) | 93 | 20 | 7 | 100 | 36 | 19 | 34 | (22 | ) | (26 | ) | 33 | 13 | 6 | 32 | 9 | – | 37 | (13 | ) | (21 | ) | |||||||||||||||||||||
| Wellbutrin | 159 | (24 | ) | (28 | ) | 168 | (30 | ) | (38 | ) | 191 | (5 | ) | (15 | ) | 217 | 18 | 3 | 125 | (38 | ) | (40 | ) | 131 | (38 | ) | (43 | ) | 128 | (41 | ) | (45 | ) | 128 | (33 | ) | (40 | ) | ||||||||||||||
| Wellbutrin IR, SR | 25 | (87 | ) | (86 | ) | 41 | (81 | ) | (83 | ) | 75 | (63 | ) | (67 | ) | 129 | (29 | ) | (39 | ) | 13 | (41 | ) | (41 | ) | 18 | (14 | ) | (18 | ) | 12 | (46 | ) | (50 | ) | 20 | – | (5 | ) | |||||||||||||
| Wellbutrin XL | 134 | >100 | >100 | 127 | >100 | >100 | 116 | >100 | – | 88 | >100 | >100 | 112 | (37 | ) | (40 | ) | 113 | (41 | ) | (45 | ) | 116 | (40 | ) | (44 | ) | 108 | (37 | ) | (44 | ) | ||||||||||||||||||||
| Imigran/Imitrex | 130 | 5 | (2 | ) | 127 | (5 | ) | (15 | ) | 109 | (11 | ) | (21 | ) | 126 | 3 | (9 | ) | 153 | 16 | 11 | 133 | – | (8 | ) | 136 | 10 | 1 | 136 | 13 | 1 | |||||||||||||||||||||
| Lamictal | 113 | 58 | 47 | 106 | 42 | 26 | 104 | 55 | 41 | 91 | 39 | 20 | 247 | 27 | 21 | 224 | 20 | 11 | 221 | 28 | 19 | 200 | 29 | 15 | ||||||||||||||||||||||||||||
| Requip | 15 | 40 | 36 | 13 | 21 | – | 13 | 25 | 8 | 12 | 20 | 9 | 64 | 29 | 23 | 59 | 39 | 28 | 59 | 54 | 44 | 56 | 70 | 51 | ||||||||||||||||||||||||||||
| Anti-virals | 291 | 12 | 4 | 307 | 19 | 6 | 296 | 12 | (1 | ) | 271 | 6 | (7 | ) | 392 | 23 | 18 | 351 | 12 | 4 | 366 | 15 | 6 | 385 | 28 | 14 | ||||||||||||||||||||||||||
| HIV | 186 | 7 | – | 198 | 13 | 1 | 191 | 6 | (5 | ) | 172 | (8 | ) | (19 | ) | 155 | (4 | ) | (8 | ) | 159 | 2 | (5 | ) | 159 | (5 | ) | (13 | ) | 164 | 1 | (10 | ) | |||||||||||||||||||
| Combivir | 70 | 3 | (4 | ) | 73 | 12 | (1 | ) | 69 | 3 | (8 | ) | 68 | (2 | ) | (14 | ) | 45 | (16 | ) | (20 | ) | 50 | (7 | ) | (12 | ) | 50 | (13 | ) | (21 | ) | 50 | (10 | ) | (19 | ) | |||||||||||||||
| Trizivir | 38 | (12 | ) | (19 | ) | 47 | (4 | ) | (13 | ) | 49 | (6 | ) | (18 | ) | 43 | (16 | ) | (26 | ) | 28 | (9 | ) | (13 | ) | 28 | (9 | ) | (18 | ) | 32 | (11 | ) | (16 | ) | 32 | (3 | ) | (14 | ) | ||||||||||||
| Epivir | 32 | – | (3 | ) | 35 | 6 | (8 | ) | 39 | 17 | 8 | 33 | (6 | ) | (20 | ) | 13 | (7 | ) | (13 | ) | 14 | (6 | ) | (13 | ) | 12 | (22 | ) | (33 | ) | 14 | (25 | ) | (30 | ) | ||||||||||||||||
| Ziagen | 17 | (6 | ) | (11 | ) | 20 | 3 | (9 | ) | 18 | (4 | ) | (14 | ) | 18 | (13 | ) | (25 | ) | 11 | – | (8 | ) | 12 | 18 | 9 | 11 | – | (8 | ) | 11 | (8 | ) | (15 | ) | |||||||||||||||||
| Retrovir | 4 | (3 | ) | – | 5 | 12 | – | 4 | 1 | (20 | ) | 4 | (10 | ) | (20 | ) | ||||||||||||||||||||||||||||||||||||
| Agenerase, Lexiva | 15 | 76 | 50 | 13 | >100 | >100 | 12 | >100 | >100 | 6 | 17 | – | 19 | – | – | 20 | 22 | 11 | 19 | 11 | 6 | 20 | 21 | 5 | ||||||||||||||||||||||||||||
| Epzicom/Kivexa | 37 | 18 | 12 | 34 | 19 | 10 | 36 | 22 | 13 | 35 | 34 | 21 | ||||||||||||||||||||||||||||||||||||||||
| Herpes | 95 | 24 | 14 | 99 | 32 | 16 | 97 | 25 | 13 | 89 | 43 | 25 | 184 | 24 | 19 | 166 | 13 | 4 | 162 | 15 | 7 | 166 | 28 | 14 | ||||||||||||||||||||||||||||
| Valtrex | 92 | 23 | 14 | 96 | 34 | 19 | 95 | 28 | 14 | 86 | 38 | 21 | 181 | 26 | 21 | 162 | 11 | 3 | 161 | 16 | 8 | 164 | 29 | 15 | ||||||||||||||||||||||||||||
| Zovirax | 3 | 93 | 50 | 3 | (19 | ) | (25 | ) | 2 | (45 | ) | (33 | ) | 3 | >100 | >100 | 3 | (50 | ) | (25 | ) | 4 | >100 | 100 | 1 | (50 | ) | (50 | ) | 2 | – | – | ||||||||||||||||||||
| Zeffix | 3 | 6 | – | 3 | 30 | 50 | 2 | 4 | (33 | ) | 3 | 34 | 50 | 3 | 33 | – | 4 | (25 | ) | – | 3 | 33 | – | 3 | – | – | ||||||||||||||||||||||||||
| Relenza | 41 | – | – | 12 | >100 | >100 | 34 | >100 | – | 44 | >100 | >100 | ||||||||||||||||||||||||||||||||||||||||
| Metabolic | 166 | (47 | ) | (48 | ) | 160 | (41 | ) | (45 | ) | 252 | (27 | ) | (32 | ) | 317 | 20 | 7 | ||||||||||||||||||||||||||||||||||
| Avandia | 99 | (59 | ) | (60 | ) | 92 | (60 | ) | (62 | ) | 169 | (42 | ) | (46 | ) | 232 | (2 | ) | (12 | ) | ||||||||||||||||||||||||||||||||
| Avandamet | 26 | (19 | ) | (19 | ) | 29 | >100 | >100 | 45 | 30 | 22 | 47 | >100 | >100 | ||||||||||||||||||||||||||||||||||||||
| Avandaryl | 5 | (71 | ) | (64 | ) | 9 | – | (10 | ) | 12 | >100 | >100 | 15 | 33 | 25 | |||||||||||||||||||||||||||||||||||||
| Bonviva/Boniva | 38 | 39 | 36 | 28 | 24 | 12 | 26 | 75 | 63 | 23 | 86 | 64 | ||||||||||||||||||||||||||||||||||||||||
| Vaccines | 204 | 29 | 26 | 237 | 97 | 82 | 105 | 27 | 17 | 82 | 11 | (1 | ) | |||||||||||||||||||||||||||||||||||||||
| Hepatitis | 54 | 28 | 26 | 66 | 82 | 69 | 47 | 21 | 12 | 32 | – | (14 | ) | |||||||||||||||||||||||||||||||||||||||
| Influenza | 99 | 68 | 68 | 93 | >100 | >100 | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||
| Infanrix, Pediarix | 44 | (4 | ) | (6 | ) | 58 | 40 | 29 | 51 | 44 | 31 | 43 | 17 | 5 | ||||||||||||||||||||||||||||||||||||||
| Boostrix | 6 | (54 | ) | (54 | ) | 20 | 50 | 43 | 7 | (11 | ) | (22 | ) | 7 | 60 | 40 | ||||||||||||||||||||||||||||||||||||
| Rotarix | – | – | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||
| Cervarix | – | – | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||
| Cardiovascular and urogenital | 136 | (51 | ) | (52 | ) | 239 | (4 | ) | (11 | ) | 292 | 39 | 28 | 303 | 15 | 3 | ||||||||||||||||||||||||||||||||||||
| Coreg | 23 | (91 | ) | (88 | ) | 144 | (21 | ) | (25 | ) | 199 | 37 | 26 | 215 | 7 | (4 | ) | |||||||||||||||||||||||||||||||||||
| Coreg CR | 34 | – | – | 31 | – | – | 9 | – | – | 14 | – | – | ||||||||||||||||||||||||||||||||||||||||
| Coreg IR | (11 | ) | – | – | 113 | (38 | ) | (41 | ) | 190 | 30 | 20 | 201 | – | (10 | ) | ||||||||||||||||||||||||||||||||||||
| Levitra | 11 | – | (8 | ) | 12 | 33 | 33 | 11 | 50 | 38 | 13 | 50 | 30 | |||||||||||||||||||||||||||||||||||||||
| Avodart | 49 | 44 | 36 | 45 | 27 | 22 | 40 | 47 | 33 | 41 | 64 | 46 | ||||||||||||||||||||||||||||||||||||||||
| Arixtra | 16 | 42 | 33 | 14 | >100 | 100 | 14 | >100 | >100 | 11 | 71 | 57 | ||||||||||||||||||||||||||||||||||||||||
| Fraxiparine | – | – | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||
| Vesicare | 14 | 67 | 56 | 13 | 56 | 44 | 12 | 86 | 71 | 11 | 71 | 57 | ||||||||||||||||||||||||||||||||||||||||
| Anti-bacterials | 85 | (45 | ) | (49 | ) | 71 | (25 | ) | (34 | ) | 89 | (13 | ) | (21 | ) | 111 | (8 | ) | (20 | ) | 52 | (5 | ) | (9 | ) | 41 | (15 | ) | (21 | ) | 49 | 17 | 7 | 53 | (6 | ) | (15 | ) | ||||||||||||||
| Augmentin | 50 | (55 | ) | (57 | ) | 42 | (14 | ) | (22 | ) | 53 | (2 | ) | (12 | ) | 78 | 8 | (6 | ) | 15 | (36 | ) | (40 | ) | 11 | (40 | ) | (45 | ) | 17 | (6 | ) | (6 | ) | 24 | (13 | ) | (23 | ) | |||||||||||||
| Augmentin IR | 19 | (41 | ) | (42 | ) | 14 | (31 | ) | (36 | ) | 11 | 67 | 57 | 15 | 36 | 15 | ||||||||||||||||||||||||||||||||||||
| Augmentin ES | 3 | (95 | ) | (94 | ) | 13 | 26 | 8 | 21 | (22 | ) | (30 | ) | 32 | (17 | ) | (28 | ) | ||||||||||||||||||||||||||||||||||
| Augmentin XR | 28 | (15 | ) | (20 | ) | 15 | (18 | ) | (29 | ) | 21 | 2 | (8 | ) | 31 | 39 | 21 | |||||||||||||||||||||||||||||||||||
| Zinnat/Ceftin | 2 | (43 | ) | (67 | ) | 1 | (77 | ) | (75 | ) | 2 | (44 | ) | (50 | ) | 4 | (50 | ) | (50 | ) | ||||||||||||||||||||||||||||||||
| Metabolic | 218 | 17 | 9 | 216 | 24 | 10 | 233 | 56 | 40 | 185 | 11 | (3 | ) | |||||||||||||||||||||||||||||||||||||||
| Avandia/Avandamet | 218 | 17 | 9 | 216 | 24 | 10 | 233 | 56 | 40 | 185 | 11 | (3 | ) | |||||||||||||||||||||||||||||||||||||||
| Vaccines | 79 | 30 | 22 | 67 | 9 | (4 | ) | 67 | 2 | (8 | ) | 55 | (14 | ) | (25 | ) | ||||||||||||||||||||||||||||||||||||
| Hepatitis | 34 | (6 | ) | (13 | ) | 34 | 1 | (13 | ) | 35 | 16 | 3 | 31 | (23 | ) | (31 | ) | |||||||||||||||||||||||||||||||||||
| Infanrix, Pediarix | 40 | 63 | 54 | 33 | 20 | 6 | 32 | (9 | ) | (18 | ) | 24 | 1 | (14 | ) | |||||||||||||||||||||||||||||||||||||
| Oncology and emesis | 165 | 6 | (1 | ) | 182 | 13 | – | 172 | (7 | ) | (17 | ) | 160 | (2 | ) | (14 | ) | 45 | (72 | ) | (72 | ) | 52 | (74 | ) | (77 | ) | 75 | (65 | ) | (67 | ) | 100 | (52 | ) | (56 | ) | |||||||||||||||
| Zofran | 140 | 10 | 3 | 152 | 16 | 3 | 141 | 1 | (9 | ) | 132 | 12 | (3 | ) | (7 | ) | – | – | 4 | (98 | ) | (98 | ) | 25 | (86 | ) | (86 | ) | 56 | (67 | ) | (69 | ) | |||||||||||||||||||
| Hycamtin | 15 | (14 | ) | (21 | ) | 17 | (6 | ) | (19 | ) | 16 | (10 | ) | (24 | ) | 16 | 4 | (6 | ) | 17 | – | (6 | ) | 18 | 12 | 6 | 16 | – | (6 | ) | 19 | 10 | (5 | ) | ||||||||||||||||||
| Tykerb | 12 | – | – | 11 | – | – | 10 | – | – | 3 | – | – | ||||||||||||||||||||||||||||||||||||||||
| Cardiovascular and urogenital | 151 | 36 | 27 | 142 | 2 | (9 | ) | 141 | 44 | 28 | 129 | 34 | 17 | |||||||||||||||||||||||||||||||||||||||
| Coreg | 114 | 33 | 24 | 108 | 33 | 17 | 112 | 55 | 38 | 91 | 29 | 12 | ||||||||||||||||||||||||||||||||||||||||
| Levitra | 5 | >100 | >100 | 3 | (82 | ) | (85 | ) | 1 | – | – | 11 | – | – | ||||||||||||||||||||||||||||||||||||||
| Avodart | 11 | >100 | >100 | 10 | 77 | 67 | 7 | >100 | – | 6 | >100 | >100 | ||||||||||||||||||||||||||||||||||||||||
| Other | 21 | 33 | 31 | 21 | (2 | ) | (19 | ) | 24 | (5 | ) | (11 | ) | 22 | (15 | ) | (27 | ) | 33 | 89 | 83 | (9 | ) | – | – | 9 | (59 | ) | (59 | ) | 32 | 44 | 28 | |||||||||||||||||||
| Zantac | 16 | 23 | 14 | 17 | 10 | (6 | ) | 20 | – | (9 | ) | 17 | (17 | ) | (26 | ) | 7 | (56 | ) | (56 | ) | 5 | (69 | ) | (69 | ) | 5 | (74 | ) | (74 | ) | 16 | (14 | ) | (24 | ) | ||||||||||||||||
| Total | 2,114 | 4 | (3 | ) | 2,106 | (4 | ) | (15 | ) | 2,112 | – | (10 | ) | 2,093 | 1 | (12 | ) | 2,297 | (8 | ) | (12 | ) | 2,230 | (7 | ) | (13 | ) | 2,327 | (2 | ) | (9 | ) | 2,419 | 3 | (7 | ) | ||||||||||||||||
Pharmaceutical turnover includes co-promotion income.
| GSK Annual Report 2007 | 163 |
| Financial record | |
| Financial record | |
| continued | |
Pharmaceutical turnover – Europe
| Q4 2004 | Q3 2004 | Q2 2004 | Q1 2004 | Q4 2007 | Q3 2007 | Q2 2007 | Q1 2007 | |||||||||||||||||||||||||||||||||||||||||||||
| £m | CER % | £% | £m | CER % | £% | £m | CER % | £% | £m | CER % | £% | £m | CER% | £% | £m | CER% | £% | £m | CER% | £% | £m | CER% | £% | |||||||||||||||||||||||||||||
| Respiratory | 403 | (2 | ) | (1 | ) | 358 | 7 | 4 | 403 | 11 | 7 | 374 | 5 | 6 | 478 | 5 | 10 | 410 | 2 | 3 | 452 | 4 | 2 | 432 | 3 | 2 | ||||||||||||||||||||||||||
| Seretide/Advair | 336 | 10 | 15 | 293 | 8 | 8 | 313 | 8 | 7 | 294 | 8 | 7 | ||||||||||||||||||||||||||||||||||||||||
| Flixotide/Flovent, Serevent | 328 | (1 | ) | 8 | 295 | 11 | 8 | 329 | 16 | 13 | 301 | 9 | 9 | |||||||||||||||||||||||||||||||||||||||
| Seretide/Advair | 238 | 7 | 8 | 213 | 21 | 17 | 240 | 29 | 25 | 211 | 18 | 19 | ||||||||||||||||||||||||||||||||||||||||
| Flixotide/Flovent | 50 | (13 | ) | (12 | ) | 43 | (5 | ) | (9 | ) | 48 | (6 | ) | (8 | ) | 48 | (6 | ) | (8 | ) | 44 | – | 5 | 34 | (13 | ) | (13 | ) | 41 | (9 | ) | (9 | ) | 42 | (9 | ) | (11 | ) | ||||||||||||||
| Serevent | 40 | (22 | ) | (22 | ) | 39 | (11 | ) | (11 | ) | 41 | (12 | ) | (15 | ) | 42 | (8 | ) | (9 | ) | 35 | – | 6 | 32 | (9 | ) | (9 | ) | 35 | (3 | ) | (3 | ) | 32 | (8 | ) | (11 | ) | ||||||||||||||
| Flixonase/Flonase | 14 | 5 | 8 | 12 | 7 | – | 19 | 5 | 6 | 14 | 10 | 8 | 12 | – | 9 | 10 | 10 | – | 16 | (6 | ) | (6 | ) | 13 | – | – | ||||||||||||||||||||||||||
| Central Nervous System | 183 | (19 | ) | (18 | ) | 181 | (10 | ) | (12 | ) | 191 | (7 | ) | (10 | ) | 193 | (6 | ) | (5 | ) | ||||||||||||||||||||||||||||||||
| Central nervous system | 133 | (8 | ) | (4 | ) | 124 | (13 | ) | (13 | ) | 128 | (14 | ) | (16 | ) | 128 | (21 | ) | (22 | ) | ||||||||||||||||||||||||||||||||
| Seroxat/Paxil | 55 | (38 | ) | (37 | ) | 58 | (32 | ) | (35 | ) | 67 | (29 | ) | (30 | ) | 71 | (27 | ) | (27 | ) | 29 | (23 | ) | (17 | ) | 27 | (23 | ) | (23 | ) | 32 | (13 | ) | (16 | ) | 34 | (17 | ) | (17 | ) | ||||||||||||
| Paxil IR | 55 | (38 | ) | (37 | ) | 58 | (32 | ) | (35 | ) | 67 | (29 | ) | (30 | ) | 71 | (27 | ) | (27 | ) | 29 | (23 | ) | (17 | ) | 27 | (23 | ) | (23 | ) | 32 | (13 | ) | (16 | ) | 34 | (17 | ) | (17 | ) | ||||||||||||
| Paxil CR | – | – | – | – | – | – | – | – | – | – | – | – | – | – | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||
| Wellbutrin | 1 | >100 | >100 | – | – | – | – | – | – | – | – | – | 1 | – | – | 2 | 100 | 100 | – | – | – | 1 | – | – | ||||||||||||||||||||||||||||
| Wellbutrin IR, SR | 1 | >100 | >100 | – | – | – | – | – | – | – | – | – | – | – | – | 1 | – | – | – | – | – | 1 | – | – | ||||||||||||||||||||||||||||
| Wellbutrin XL | – | – | – | – | – | – | – | – | – | – | – | – | 1 | – | – | 1 | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||
| Imigran/Imitrex | 35 | (15 | ) | (15 | ) | 36 | 2 | – | 36 | 2 | (3 | ) | 35 | 6 | 6 | 24 | (8 | ) | (4 | ) | 22 | (19 | ) | (15 | ) | 22 | (27 | ) | (27 | ) | 21 | (41 | ) | (43 | ) | |||||||||||||||||
| Lamictal | 58 | (2 | ) | – | 54 | 10 | 8 | 56 | 17 | 12 | 51 | 15 | 16 | 38 | (10 | ) | (3 | ) | 36 | (12 | ) | (14 | ) | 36 | (22 | ) | (22 | ) | 35 | (25 | ) | (27 | ) | |||||||||||||||||||
| Requip | 15 | 8 | 7 | 14 | 22 | 17 | 14 | 32 | 27 | 13 | 28 | 30 | 25 | 14 | 19 | 23 | 10 | 10 | 22 | 10 | 10 | 21 | 11 | 11 | ||||||||||||||||||||||||||||
| Anti-virals | 189 | 3 | 3 | 170 | (1 | ) | (4 | ) | 183 | (3 | ) | (6 | ) | 183 | 6 | 7 | 207 | (7 | ) | (2 | ) | 207 | (5 | ) | (5 | ) | 230 | 7 | 6 | 226 | 11 | 8 | ||||||||||||||||||||
| HIV | 146 | 2 | 3 | 132 | – | (4 | ) | 141 | (1 | ) | (5 | ) | 140 | 9 | 9 | 156 | 1 | 7 | 148 | – | (1 | ) | 156 | (3 | ) | (4 | ) | 152 | (5 | ) | (7 | ) | ||||||||||||||||||||
| Combivir | 60 | 6 | 5 | 54 | 3 | 2 | 56 | 1 | (5 | ) | 56 | 13 | 14 | 45 | (10 | ) | (6 | ) | 47 | (10 | ) | (10 | ) | 51 | (12 | ) | (12 | ) | 49 | (15 | ) | (17 | ) | |||||||||||||||||||
| Trizivir | 32 | (15 | ) | (14 | ) | 30 | (10 | ) | (14 | ) | 34 | (10 | ) | (11 | ) | 34 | 3 | 3 | 25 | (8 | ) | – | 23 | (19 | ) | (15 | ) | 24 | (10 | ) | (17 | ) | 27 | (16 | ) | (16 | ) | |||||||||||||||
| Epivir | 30 | 10 | 11 | 27 | 5 | – | 29 | 8 | 4 | 29 | 16 | 16 | 15 | (22 | ) | (17 | ) | 16 | (24 | ) | (24 | ) | 18 | (24 | ) | (28 | ) | 18 | (31 | ) | (31 | ) | ||||||||||||||||||||
| Ziagen | 16 | 4 | 7 | 14 | (3 | ) | (7 | ) | 15 | (4 | ) | (6 | ) | 15 | (3 | ) | – | 9 | (10 | ) | (10 | ) | 9 | (10 | ) | (10 | ) | 10 | (10 | ) | – | 9 | (9 | ) | (18 | ) | ||||||||||||||||
| Retrovir | 4 | 14 | – | 4 | (3 | ) | – | 4 | 4 | – | 4 | 2 | – | |||||||||||||||||||||||||||||||||||||||
| Agenerasee, Lexiva | 4 | 65 | 100 | 3 | 28 | – | 3 | (9 | ) | – | 2 | 2 | – | |||||||||||||||||||||||||||||||||||||||
| Agenerase, Lexiva | 14 | 8 | 17 | 13 | 17 | 8 | 13 | 8 | 8 | 13 | 8 | 8 | ||||||||||||||||||||||||||||||||||||||||
| Epzicom/Kivexa | 43 | 45 | 48 | 37 | 42 | 42 | 36 | 57 | 57 | 33 | 79 | 74 | ||||||||||||||||||||||||||||||||||||||||
| Herpes | 35 | 2 | 3 | 31 | (8 | ) | (14 | ) | 35 | (12 | ) | (15 | ) | 37 | (2 | ) | – | 41 | 6 | 14 | 36 | 3 | – | 38 | 6 | 6 | 36 | 3 | – | |||||||||||||||||||||||
| Valtrex | 23 | 12 | 15 | 22 | 6 | – | 23 | (4 | ) | (8 | ) | 22 | 12 | 16 | 33 | 11 | 22 | 29 | 7 | 4 | 30 | 7 | 7 | 28 | 12 | 8 | ||||||||||||||||||||||||||
| Zovirax | 12 | (13 | ) | (14 | ) | 9 | (31 | ) | (36 | ) | 12 | (23 | ) | (25 | ) | 15 | (17 | ) | (17 | ) | 8 | (11 | ) | (11 | ) | 7 | (13 | ) | (13 | ) | 8 | – | – | 8 | (20 | ) | (20 | ) | ||||||||||||||
| Zeffix | 6 | 13 | 20 | 6 | 37 | 50 | 5 | 38 | 25 | 5 | 24 | 25 | 6 | – | – | 6 | – | – | 6 | – | – | 6 | 20 | 20 | ||||||||||||||||||||||||||||
| Relenza | 4 | (91 | ) | (82 | ) | 14 | (44 | ) | (44 | ) | 26 | >100 | >100 | 32 | >100 | >100 | ||||||||||||||||||||||||||||||||||||
| Metabolic | 79 | 7 | 14 | 65 | 2 | 2 | 79 | 31 | 30 | 71 | 24 | 22 | ||||||||||||||||||||||||||||||||||||||||
| Avandia | 25 | (20 | ) | (17 | ) | 26 | (17 | ) | (13 | ) | 31 | (3 | ) | (6 | ) | 31 | (3 | ) | (3 | ) | ||||||||||||||||||||||||||||||||
| Avandamet | 31 | 7 | 15 | 23 | (8 | ) | (8 | ) | 31 | 52 | 48 | 26 | 37 | 37 | ||||||||||||||||||||||||||||||||||||||
| Avandaryl | 1 | – | – | 1 | – | – | 1 | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||
| Bonviva/Boniva | 15 | >100 | >100 | 11 | >100 | >100 | 10 | >100 | >100 | 9 | >100 | >100 | ||||||||||||||||||||||||||||||||||||||||
| Vaccines | 258 | 24 | 29 | 206 | 22 | 22 | 178 | 3 | 2 | 172 | 6 | 4 | ||||||||||||||||||||||||||||||||||||||||
| Hepatitis | 65 | 3 | 8 | 55 | 2 | 2 | 59 | 5 | 2 | 56 | 2 | 2 | ||||||||||||||||||||||||||||||||||||||||
| Influenza | 56 | >100 | >100 | 37 | >100 | >100 | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||
| Infanrix, Pediarix | 74 | (4 | ) | 3 | 62 | (5 | ) | (5 | ) | 66 | (13 | ) | (13 | ) | 73 | 10 | 7 | |||||||||||||||||||||||||||||||||||
| Boostrix | 5 | – | – | 5 | 67 | 67 | 5 | 25 | 25 | 4 | 33 | 33 | ||||||||||||||||||||||||||||||||||||||||
| Rotarix | 7 | >100 | >100 | 6 | >100 | >100 | 6 | >100 | >100 | 4 | – | – | ||||||||||||||||||||||||||||||||||||||||
| Cervarix | 9 | – | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||
| Cardiovascular and urogenital | 113 | 5 | 12 | 96 | (1 | ) | – | 103 | 3 | 1 | 100 | 6 | 4 | |||||||||||||||||||||||||||||||||||||||
| Coreg | – | – | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||
| Coreg CR | – | – | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||
| Coreg IR | – | – | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||
| Levitra | 2 | – | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||
| Avodart | 26 | 26 | 37 | 21 | 29 | 24 | 21 | 24 | 24 | 18 | 13 | 13 | ||||||||||||||||||||||||||||||||||||||||
| Arixtra | 11 | 57 | 57 | 9 | 33 | 50 | 10 | 83 | 67 | 9 | >100 | >100 | ||||||||||||||||||||||||||||||||||||||||
| Fraxiparine | 43 | (9 | ) | (2 | ) | 35 | (20 | ) | (20 | ) | 40 | (15 | ) | (15 | ) | 42 | (2 | ) | (5 | ) | ||||||||||||||||||||||||||||||||
| Vesicare | – | – | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||
| Anti-bacterials | 184 | (11 | ) | (11 | ) | 154 | (8 | ) | (10 | ) | 169 | 3 | (2 | ) | 194 | (5 | ) | (5 | ) | 176 | 2 | 7 | 130 | (4 | ) | (4 | ) | 131 | (11 | ) | (12 | ) | 175 | (1 | ) | (3 | ) | |||||||||||||||
| Augmentin | 78 | (12 | ) | (11 | ) | 63 | (14 | ) | (17 | ) | 75 | 5 | 1 | 82 | (12 | ) | (13 | ) | 71 | 1 | 6 | 54 | – | – | 52 | (20 | ) | (19 | ) | 73 | (10 | ) | (12 | ) | ||||||||||||||||||
| Augmentin IR | 76 | (13 | ) | (13 | ) | 62 | (16 | ) | (18 | ) | 74 | 2 | – | 81 | (13 | ) | (14 | ) | ||||||||||||||||||||||||||||||||||
| Augmentin ES | – | – | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||
| Augmentin XR | 2 | >100 | 100 | 1 | >100 | – | 1 | >100 | >100 | 1 | >100 | >100 | ||||||||||||||||||||||||||||||||||||||||
| Zinnat/Ceftin | 36 | (17 | ) | (14 | ) | 25 | 1 | (4 | ) | 31 | 14 | 7 | 41 | 9 | 11 | |||||||||||||||||||||||||||||||||||||
| Metabolic | 37 | 13 | 12 | 36 | 15 | 9 | 31 | 26 | 24 | 31 | 25 | 24 | ||||||||||||||||||||||||||||||||||||||||
| Avandia/Avandamet | 29 | 32 | 32 | 27 | 49 | 42 | 25 | 47 | 47 | 22 | 83 | 83 | ||||||||||||||||||||||||||||||||||||||||
| Vaccines | 156 | 20 | 21 | 150 | 17 | 14 | 116 | (5 | ) | (9 | ) | 101 | (6 | ) | (6 | ) | ||||||||||||||||||||||||||||||||||||
| Hepatitis | 56 | 19 | 17 | 52 | 17 | 16 | 51 | (3 | ) | (7 | ) | 42 | (5 | ) | (5 | ) | ||||||||||||||||||||||||||||||||||||
| Infanrix/Pediarix | 48 | 23 | 30 | 41 | 14 | 8 | 38 | (4 | ) | (10 | ) | 35 | 13 | 17 | ||||||||||||||||||||||||||||||||||||||
| ONCOLOGY AND EMESIS | 42 | 2 | 2 | 42 | 6 | 5 | 44 | 7 | 2 | 42 | 8 | 8 | ||||||||||||||||||||||||||||||||||||||||
| Oncology and emesis | 38 | 9 | 15 | 35 | (8 | ) | (5 | ) | 34 | (17 | ) | (19 | ) | 32 | (20 | ) | (22 | ) | ||||||||||||||||||||||||||||||||||
| Zofran | 32 | – | – | 32 | 4 | – | 34 | 7 | 6 | 32 | 8 | 7 | 17 | (24 | ) | (19 | ) | 17 | (32 | ) | (32 | ) | 17 | (42 | ) | (45 | ) | 20 | (33 | ) | (33 | ) | ||||||||||||||||||||
| Hycamtin | 8 | 15 | 33 | 7 | 14 | 17 | 7 | 11 | – | 7 | 14 | 17 | 12 | 25 | 50 | 11 | 10 | 10 | 10 | 22 | 11 | 9 | 29 | 29 | ||||||||||||||||||||||||||||
| Tykerb | 5 | – | – | 5 | – | – | 2 | – | – | 1 | – | – | ||||||||||||||||||||||||||||||||||||||||
| Cardiovascular and urogenital | 96 | 100 | 100 | 64 | 53 | 45 | 53 | 29 | 26 | 49 | 16 | 17 | ||||||||||||||||||||||||||||||||||||||||
| Coreg | – | – | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||
| Levitra | 6 | 47 | 50 | 5 | 99 | 67 | 5 | >100 | >100 | 5 | 93 | >100 | ||||||||||||||||||||||||||||||||||||||||
| Avodart | 10 | >100 | >100 | 7 | >100 | >100 | 6 | >100 | >100 | 4 | >100 | >100 | ||||||||||||||||||||||||||||||||||||||||
| Other | 107 | 20 | 19 | 67 | (13 | ) | (16 | ) | 73 | (16 | ) | (20 | ) | 79 | (14 | ) | (16 | ) | 80 | (4 | ) | – | 63 | 2 | 3 | 67 | 6 | 5 | 56 | (3 | ) | (3 | ) | |||||||||||||||||||
| Zantac | 17 | (22 | ) | (26 | ) | 17 | (26 | ) | (23 | ) | 18 | (18 | ) | (25 | ) | 20 | (22 | ) | (20 | ) | 11 | (23 | ) | (15 | ) | 10 | (9 | ) | (9 | ) | 11 | (14 | ) | (21 | ) | 10 | (29 | ) | (29 | ) | ||||||||||||
| Total | 1,397 | 2 | 2 | 1,222 | 3 | – | 1,263 | 2 | (2 | ) | 1,246 | – | – | 1,562 | 4 | 9 | 1,336 | 1 | 1 | 1,402 | 1 | – | 1,392 | 1 | – | |||||||||||||||||||||||||||
Pharmaceutical turnover includes co-promotion income.
| 164 | GSK Annual Report 2007 |
| INVESTOR INFORMATION | |
| Financial record | |
| Financial record | |
Pharmaceutical turnover – International
| Q4 2004 | Q3 2004 | Q2 2004 | Q1 2004 | Q4 2007 | Q3 2007 | Q2 2007 | Q1 2007 | ||||||||||||||||||||||||||||||||||||||||||||
| £m | CER % | £% | £m | CER % | £% | £m | CER % | £% | £m | CER % | £% | £m | CER% | £% | £m | CER% | £% | £m | CER% | £% | £m | CER% | £% | ||||||||||||||||||||||||||||
| Respiratory | 202 | 8 | 5 | 156 | – | (7 | ) | 172 | 9 | 4 | 164 | (1 | ) | (2 | ) | 253 | 12 | 15 | 205 | 8 | 6 | 215 | 8 | 3 | 210 | 10 | (2 | ) | |||||||||||||||||||||||
| Seretide/Advair | 109 | 37 | 43 | 90 | 15 | 15 | 91 | 25 | 20 | 82 | 14 | 3 | |||||||||||||||||||||||||||||||||||||||
Flixotide/Flovent, Serevent | 134 | 13 | 11 | 106 | 3 | (3 | ) | 118 | 14 | 9 | 107 | 13 | 14 | ||||||||||||||||||||||||||||||||||||||
| Seretide/Advair | 63 | 21 | 15 | 54 | 5 | – | 59 | 17 | 11 | 53 | 18 | 20 | |||||||||||||||||||||||||||||||||||||||
| Flixotide/Flovent | 53 | 3 | 2 | 39 | (3 | ) | (7 | ) | 43 | 4 | (2 | ) | 43 | 5 | 8 | 50 | (6 | ) | (2 | ) | 39 | (5 | ) | (7 | ) | 45 | (4 | ) | (10 | ) | 42 | 7 | (7 | ) | |||||||||||||||||
| Serevent | 18 | 22 | 29 | 13 | 14 | – | 16 | 45 | 45 | 11 | 16 | 10 | 17 | (11 | ) | (11 | ) | 13 | – | (7 | ) | 17 | 6 | – | 14 | 7 | (7 | ) | |||||||||||||||||||||||
| Flixonase/Flonase | 24 | 23 | 9 | 14 | 14 | 17 | 14 | 3 | (7 | ) | 17 | (38 | ) | (39 | ) | 19 | – | (5 | ) | 18 | – | 20 | 14 | – | (18 | ) | 25 | 17 | 4 | ||||||||||||||||||||||
| Central Nervous System | 118 | (10 | ) | (12 | ) | 110 | (7 | ) | (13 | ) | 107 | (15 | ) | (18 | ) | 109 | 6 | 5 | |||||||||||||||||||||||||||||||||
| Central nervous system | 129 | 9 | 9 | 112 | 5 | 2 | 114 | 2 | (7 | ) | 103 | 6 | (6 | ) | |||||||||||||||||||||||||||||||||||||
| Seroxat/Paxil | 79 | (13 | ) | (16 | ) | 71 | (11 | ) | (14 | ) | 71 | (13 | ) | (17 | ) | 72 | 11 | 9 | 83 | 8 | 5 | 68 | 3 | (1 | ) | 74 | 1 | (9 | ) | 63 | 7 | (6 | ) | ||||||||||||||||||
| Paxil IR | 76 | (16 | ) | (18 | ) | 69 | (13 | ) | (17 | ) | 69 | (15 | ) | (19 | ) | 71 | 10 | 8 | 78 | 7 | 4 | 65 | 3 | (2 | ) | 69 | 1 | (9 | ) | 59 | 6 | (6 | ) | ||||||||||||||||||
| Paxil CR | 3 | >100 | >100 | 2 | >100 | – | 2 | >100 | 100 | 1 | >100 | >100 | 5 | 25 | 25 | 3 | – | – | 5 | – | – | 4 | 25 | – | |||||||||||||||||||||||||||
| Wellbutrin | 4 | (29 | ) | (33 | ) | 5 | (8 | ) | (29 | ) | 2 | (78 | ) | (67 | ) | 4 | (28 | ) | (33 | ) | 4 | 25 | – | 2 | (50 | ) | (50 | ) | 4 | (20 | ) | (20 | ) | 3 | – | – | |||||||||||||||
| Wellbutrin IR, SR | 4 | (34 | ) | (33 | ) | 4 | (18 | ) | (43 | ) | 1 | (86 | ) | (83 | ) | 4 | (36 | ) | (33 | ) | 3 | 33 | – | 2 | (33 | ) | (33 | ) | 3 | – | – | 2 | – | – | |||||||||||||||||
| Wellbutrin XL | – | – | – | 1 | >(100 | ) | – | 1 | – | – | – | – | – | 1 | – | – | – | – | – | 1 | (50 | ) | (50 | ) | 1 | – | – | ||||||||||||||||||||||||
| Imigran/Imitrex | 12 | (2 | ) | (14 | ) | 12 | (2 | ) | (8 | ) | 13 | (16 | ) | (13 | ) | 11 | – | – | 10 | (9 | ) | (9 | ) | 10 | 10 | – | 9 | (9 | ) | (18 | ) | 9 | – | (10 | ) | ||||||||||||||||
| Lamictal | 11 | 14 | – | 12 | 12 | 9 | 11 | 10 | – | 11 | 11 | 10 | 16 | 21 | 14 | 15 | – | 7 | 14 | 15 | 8 | 15 | 13 | – | |||||||||||||||||||||||||||
| Requip | 2 | 23 | – | 2 | 43 | 100 | 2 | 39 | 100 | 1 | 35 | – | 6 | 67 | 100 | 5 | 67 | 67 | 3 | 67 | – | 3 | 50 | 50 | |||||||||||||||||||||||||||
| Anti-virals | 126 | 7 | 5 | 120 | 10 | 1 | 116 | 5 | (1 | ) | 108 | 5 | – | 192 | 18 | 18 | 156 | 11 | 7 | 159 | 9 | 1 | 157 | 15 | 3 | ||||||||||||||||||||||||||
| HIV | 43 | 13 | 8 | 42 | 11 | 2 | 36 | (4 | ) | (10 | ) | 36 | 12 | 6 | 48 | 4 | 4 | 53 | 17 | 15 | 49 | 6 | 2 | 43 | (7 | ) | (20 | ) | |||||||||||||||||||||||
| Combivir | 17 | 3 | – | 17 | – | (11 | ) | 16 | (13 | ) | (11 | ) | 15 | 8 | (6 | ) | 18 | 13 | 20 | 18 | 25 | 13 | 16 | (20 | ) | (20 | ) | 16 | (14 | ) | (27 | ) | |||||||||||||||||||
| Trizivir | 5 | 12 | 25 | 2 | (2 | ) | (33 | ) | 4 | 5 | – | 4 | 52 | 33 | 3 | (25 | ) | (25 | ) | 4 | >100 | 100 | 4 | (40 | ) | (20 | ) | 3 | 33 | – | |||||||||||||||||||||
| Epivir | 11 | 31 | 10 | 11 | 11 | 10 | 9 | 1 | (10 | ) | 9 | 15 | 13 | 9 | (20 | ) | (10 | ) | 8 | – | (11 | ) | 10 | (10 | ) | – | 9 | (21 | ) | (36 | ) | ||||||||||||||||||||
| Ziagen | 5 | 18 | – | 8 | 54 | 33 | 4 | 13 | (20 | ) | 5 | 14 | 25 | 8 | – | 33 | 7 | – | – | 6 | – | (14 | ) | 6 | (13 | ) | (25 | ) | |||||||||||||||||||||||
| Retrovir | 3 | 16 | – | 2 | 4 | – | 3 | (8 | ) | – | 2 | (1 | ) | – | |||||||||||||||||||||||||||||||||||||
| Agenerase,Lexiva | 2 | (10 | ) | 100 | 2 | >100 | 100 | – | – | – | 1 | (19 | ) | – | |||||||||||||||||||||||||||||||||||||
| Agenerase, Lexiva | 3 | 67 | – | 4 | – | – | 1 | – | (50 | ) | 2 | – | – | ||||||||||||||||||||||||||||||||||||||
| Epzicom/Kivexa | 10 | 14 | 43 | 9 | 67 | 50 | 7 | >100 | >100 | 7 | >100 | >100 | |||||||||||||||||||||||||||||||||||||||
| Herpes | 53 | 5 | – | 49 | 2 | – | 50 | 4 | (2 | ) | 48 | 13 | 12 | 58 | 13 | 12 | 54 | 15 | 17 | 52 | 2 | (10 | ) | 48 | (4 | ) | (13 | ) | |||||||||||||||||||||||
| Valtrex | 31 | 18 | 11 | 29 | 19 | 16 | 27 | 15 | 13 | 25 | 27 | 25 | 41 | 20 | 17 | 38 | 28 | 31 | 35 | 8 | (5 | ) | 32 | – | (9 | ) | |||||||||||||||||||||||||
| Zovirax | 22 | (9 | ) | (12 | ) | 20 | (15 | ) | (17 | ) | 23 | (7 | ) | (15 | ) | 23 | 1 | – | 17 | – | – | 16 | (6 | ) | (6 | ) | 17 | (10 | ) | (19 | ) | 16 | (10 | ) | (20 | ) | |||||||||||||||
| Zeffix | 25 | (4 | ) | (4 | ) | 24 | 7 | (8 | ) | 26 | 10 | 4 | 22 | (1 | ) | (12 | ) | 33 | (6 | ) | – | 32 | 9 | – | 35 | 16 | 13 | 31 | 17 | 3 | |||||||||||||||||||||
| Relenza | 30 | >100 | 100 | 2 | – | (67 | ) | 7 | – | – | 16 | >100 | >100 | ||||||||||||||||||||||||||||||||||||||
| Metabolic | 76 | (13 | ) | (10 | ) | 72 | (13 | ) | (15 | ) | 89 | (3 | ) | (7 | ) | 88 | 21 | 9 | |||||||||||||||||||||||||||||||||
| Avandia | 36 | (33 | ) | (25 | ) | 35 | (27 | ) | (31 | ) | 49 | (17 | ) | (18 | ) | 52 | 23 | 11 | |||||||||||||||||||||||||||||||||
| Avandamet | 7 | (11 | ) | (22 | ) | 8 | – | 33 | 9 | 67 | 50 | 10 | >100 | 100 | |||||||||||||||||||||||||||||||||||||
| Avandaryl | 1 | – | – | 2 | 100 | 100 | 2 | – | – | 1 | – | – | |||||||||||||||||||||||||||||||||||||||
| Bonviva/Boniva | (1 | ) | – | – | 2 | – | >100 | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||
| Vaccines | 172 | 1 | 4 | 150 | 35 | 33 | 115 | (3 | ) | (6 | ) | 114 | 3 | (3 | ) | ||||||||||||||||||||||||||||||||||||
| Hepatitis | 28 | 12 | 12 | 20 | – | (5 | ) | 22 | – | 5 | 25 | 17 | 4 | ||||||||||||||||||||||||||||||||||||||
| Influenza | 19 | (20 | ) | (24 | ) | 11 | 10 | 10 | 4 | (57 | ) | (43 | ) | 1 | – | – | |||||||||||||||||||||||||||||||||||
| Infanrix, Pediarix | 19 | 12 | 12 | 17 | 33 | 42 | 18 | 36 | 29 | 18 | 27 | 20 | |||||||||||||||||||||||||||||||||||||||
| Boostrix | 2 | – | – | 1 | 100 | – | 2 | – | 100 | 2 | – | – | |||||||||||||||||||||||||||||||||||||||
| Rotarix | 32 | 60 | 60 | 17 | >100 | >100 | 9 | >100 | >100 | 10 | 57 | 43 | |||||||||||||||||||||||||||||||||||||||
| Cervarix | – | – | – | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||||||||||
| Cardiovascular and urogenital | 49 | 26 | 26 | 43 | 10 | 5 | 44 | (13 | ) | (17 | ) | 36 | 11 | – | |||||||||||||||||||||||||||||||||||||
| Coreg | – | – | – | 1 | 50 | (50 | ) | 3 | – | 50 | 2 | 100 | 100 | ||||||||||||||||||||||||||||||||||||||
| Coreg CR | (1 | ) | – | – | – | – | – | 1 | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||
| Coreg IR | 1 | – | – | 1 | – | (50 | ) | 2 | – | – | 2 | 100 | 100 | ||||||||||||||||||||||||||||||||||||||
| Levitra | (2 | ) | – | – | 1 | (50 | ) | (50 | ) | – | – | – | 1 | – | – | ||||||||||||||||||||||||||||||||||||
| Avodart | 8 | 17 | 33 | 6 | >100 | 100 | 6 | 50 | 50 | 4 | 67 | 33 | |||||||||||||||||||||||||||||||||||||||
| Arixtra | 2 | – | – | 2 | – | – | 2 | – | 100 | – | – | – | |||||||||||||||||||||||||||||||||||||||
| Fraxiparine | 8 | (11 | ) | (11 | ) | 6 | 20 | 20 | 5 | (33 | ) | (44 | ) | 5 | (29 | ) | (29 | ) | |||||||||||||||||||||||||||||||||
| Vesicare | – | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||
| Anti-bacterials | 127 | (3 | ) | (7 | ) | 128 | (1 | ) | (9 | ) | 128 | 3 | (4 | ) | 121 | 4 | (2 | ) | 142 | 6 | 7 | 131 | 6 | 6 | 130 | 2 | (1 | ) | 120 | (3 | ) | (12 | ) | ||||||||||||||||||
| Augmentin | 42 | (6 | ) | (13 | ) | 51 | 14 | 9 | 50 | 19 | 11 | 44 | 10 | 7 | 60 | 9 | 13 | 52 | 11 | 11 | 51 | 6 | (2 | ) | 50 | (5 | ) | (11 | ) | ||||||||||||||||||||||
| Augmentin IR | 40 | (5 | ) | (15 | ) | 49 | 12 | 7 | 49 | 17 | 9 | 43 | 7 | 5 | |||||||||||||||||||||||||||||||||||||
| Augmentin ES | 2 | (12 | ) | 100 | 1 | >100 | – | 1 | >100 | >100 | 1 | >100 | >100 | ||||||||||||||||||||||||||||||||||||||
| Augmentin XR | – | – | – | 1 | >100 | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||||||||||
| Zinnat/Ceftin | 20 | (3 | ) | (9 | ) | 19 | (24 | ) | (30 | ) | 19 | (8 | ) | (14 | ) | 18 | 10 | (5 | ) | ||||||||||||||||||||||||||||||||
| Metabolic | 69 | 23 | 19 | 68 | 35 | 28 | 75 | 53 | 42 | 54 | 29 | 23 | |||||||||||||||||||||||||||||||||||||||
| Avandia, Avandamet | 40 | 40 | 33 | 41 | 73 | 64 | 49 | 90 | 75 | 31 | 43 | 35 | |||||||||||||||||||||||||||||||||||||||
| Vaccines | 115 | 24 | 20 | 111 | 40 | 35 | 95 | 19 | 12 | 84 | 1 | – | |||||||||||||||||||||||||||||||||||||||
| Hepatitis | 19 | 21 | 27 | 16 | (5 | ) | (11 | ) | 19 | 16 | 12 | 17 | 3 | (6 | ) | ||||||||||||||||||||||||||||||||||||
| Infanrix/Pediarix | 12 | 14 | (8 | ) | 21 | 47 | 50 | 16 | (16 | ) | (24 | ) | 17 | – | – | ||||||||||||||||||||||||||||||||||||
| Oncology and emesis | 22 | 2 | (4 | ) | 22 | (11 | ) | (19 | ) | 21 | (2 | ) | (9 | ) | 20 | (9 | ) | (9 | ) | 17 | (6 | ) | (6 | ) | 17 | (5 | ) | (11 | ) | 17 | (14 | ) | (19 | ) | 15 | (27 | ) | (32 | ) | ||||||||||||
| Zofran | 18 | 1 | (5 | ) | 17 | (9 | ) | (11 | ) | 17 | 2 | (11 | ) | 16 | (1 | ) | – | 12 | (21 | ) | (14 | ) | 11 | (8 | ) | (15 | ) | 13 | (13 | ) | (13 | ) | 11 | (37 | ) | (42 | ) | ||||||||||||||
| Hycamtin | 1 | (9 | ) | – | 2 | 15 | – | 2 | (15 | ) | 100 | 1 | (51 | ) | (67 | ) | 2 | 50 | – | 1 | – | – | 2 | (50 | ) | – | 2 | – | – | ||||||||||||||||||||||
| Cardiovascular and urogenital | 33 | 22 | 18 | 27 | 15 | 4 | 26 | 9 | – | 22 | 15 | 10 | |||||||||||||||||||||||||||||||||||||||
| Coreg | 1 | (52 | ) | (75 | ) | 2 | (53 | ) | (60 | ) | 1 | (47 | ) | (67 | ) | 3 | (18 | ) | – | ||||||||||||||||||||||||||||||||
| Levitra | 1 | 40 | – | 3 | 47 | 50 | 3 | >100 | >100 | 1 | – | – | |||||||||||||||||||||||||||||||||||||||
| Avodart | 2 | >100 | – | – | – | – | 1 | >100 | – | – | – | – | |||||||||||||||||||||||||||||||||||||||
| Tykerb | 2 | – | – | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||||||||||
| Other | 164 | – | (6 | ) | 143 | (15 | ) | (21 | ) | 151 | (15 | ) | (20 | ) | 159 | (1 | ) | (8 | ) | 158 | (2 | ) | (1 | ) | 153 | 5 | 2 | 163 | 11 | 7 | 152 | 2 | (8 | ) | |||||||||||||||||
| Zantac | 36 | (8 | ) | (8 | ) | 32 | (14 | ) | (20 | ) | 32 | (21 | ) | (26 | ) | 31 | (7 | ) | (11 | ) | 25 | – | (4 | ) | 22 | (4 | ) | (8 | ) | 24 | (11 | ) | (14 | ) | 22 | (17 | ) | (27 | ) | ||||||||||||
| Total | 976 | 5 | 1 | 885 | 3 | (4 | ) | 891 | 3 | (4 | ) | 841 | 3 | (1 | ) | 1,188 | 6 | 8 | 1,039 | 9 | 6 | 1,046 | 3 | (2 | ) | 995 | 7 | 4 | |||||||||||||||||||||||
Pharmaceutical turnover includes co-promotion income.
| GSK Annual Report 2007 | 165 |
| Financial record | |
| Financial record | |
| continued | |
A record of financial performance is provided analysed in accordance with current reporting practice. The information included in the Five year record is prepared in accordance with IFRS as adopted by the European Union and also with IFRS as issued by the International Accounting Standards Board.
| Turnover by business segment | 2004 | 2003 | 2002 | 2001 | 2000 | 2007 | 2006 | 2005 | 2004 | 2003 | |||||||||||
| £m | £m | £m | £m | £m | |||||||||||||||||
| £m | £m | £m | £m | £m | |||||||||||||||||
| Pharmaceuticals | 17,146 | 18,181 | 17,995 | 17,205 | 15,429 | 19,233 | 20,078 | 18,661 | 17,100 | 18,114 | |||||||||||
| Consumer Healthcare | 3,213 | 3,260 | 3,217 | 3,284 | 2,650 | 3,483 | 3,147 | 2,999 | 2,886 | 2,956 | |||||||||||
| 20,359 | 21,441 | 21,212 | 20,489 | 18,079 | 22,716 | 23,225 | 21,660 | 19,986 | 21,070 | ||||||||||||
| Pharmaceutical turnover by therapeutic area | 2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||
| £m | £m | £m | £m | £m | |||||||||||||||||
| Respiratory | 5,032 | 4,995 | 5,054 | 4,394 | 4,390 | ||||||||||||||||
| Central nervous system | 3,463 | 4,455 | 4,511 | 4,007 | 3,279 | 3,348 | 3,642 | 3,219 | 3,462 | 4,446 | |||||||||||
| Respiratory | 4,415 | 4,417 | 3,987 | 3,537 | 2,789 | ||||||||||||||||
| Anti-bacterials | 1,561 | 1,815 | 2,210 | 2,604 | 2,472 | ||||||||||||||||
| Anti-virals | 2,360 | 2,349 | 2,299 | 2,128 | 1,899 | 3,028 | 2,827 | 2,598 | 2,359 | 2,345 | |||||||||||
| Metabolic | 1,253 | 1,079 | 960 | 875 | 589 | 1,514 | 1,875 | 1,495 | 1,251 | 1,077 | |||||||||||
| Vaccines | 1,196 | 1,123 | 1,080 | 948 | 842 | 1,993 | 1,692 | 1,389 | 1,194 | 1,121 | |||||||||||
| Cardiovascular and urogenital | 1,554 | 1,636 | 1,331 | 932 | 770 | ||||||||||||||||
| Anti-bacterials | 1,330 | 1,369 | 1,519 | 1,547 | 1,800 | ||||||||||||||||
| Oncology and emesis | 934 | 1,001 | 977 | 838 | 710 | 477 | 1,069 | 1,016 | 934 | 1,000 | |||||||||||
| Cardiovascular and urogenital | 933 | 771 | 661 | 591 | 463 | ||||||||||||||||
| Others | 1,031 | 1,171 | 1,310 | 1,677 | 1,939 | ||||||||||||||||
| Continuing business | 17,146 | 18,181 | 17,995 | 17,205 | 14,982 | ||||||||||||||||
| Divested products | – | – | – | – | 447 | ||||||||||||||||
| Other | 957 | 973 | 1,040 | 1,027 | 1,165 | ||||||||||||||||
| 17,146 | 18,181 | 17,995 | 17,205 | 15,429 | 19,233 | 20,078 | 18,661 | 17,100 | 18,114 | ||||||||||||
| Pharmaceutical turnover by geographic area | 2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||
| £m | £m | £m | £m | £m | |||||||||||||||||
| USA | 8,425 | 9,410 | 9,797 | 9,037 | 7,705 | 9,273 | 10,353 | 9,106 | 8,425 | 9,410 | |||||||||||
| Europe | 5,128 | 5,114 | 4,701 | 4,561 | 4,268 | 5,692 | 5,547 | 5,537 | 5,084 | 5,050 | |||||||||||
| International: | |||||||||||||||||||||
| Asia Pacific | 1,162 | 1,140 | 1,100 | 1,047 | 975 | 1,441 | 1,377 | 1,324 | 1,161 | 1,138 | |||||||||||
| Japan | 770 | 753 | 712 | 741 | 832 | 867 | 860 | 854 | 769 | 751 | |||||||||||
| Middle East, Africa | 774 | 744 | 746 | 669 | 693 | ||||||||||||||||
| Latin America | 581 | 597 | 606 | 790 | 682 | 709 | 714 | 651 | 581 | 598 | |||||||||||
| Middle East, Africa | 669 | 693 | 652 | 611 | 585 | ||||||||||||||||
| Canada | 411 | 474 | 427 | 418 | 382 | 477 | 483 | 443 | 411 | 474 | |||||||||||
| International | 3,593 | 3,657 | 3,497 | 3,607 | 3,456 | 4,268 | 4,178 | 4018 | 3,591 | 3,654 | |||||||||||
| 17,146 | 18,181 | 17,995 | 17,205 | 15,429 | 19,233 | 20,078 | 18,661 | 17,100 | 18,114 | ||||||||||||
| Pharmaceutical turnover in 2004 and 2003 includes co-promotion income. | |||||||||||||||||||||
| Consumer Healthcare sales | |||||||||||||||||||||
| OTC medicines | 1,489 | 1,556 | 1,586 | 1,603 | 1,454 | ||||||||||||||||
| Oral care | 1,088 | 1,082 | 1,052 | 1,106 | 642 | ||||||||||||||||
| Nutritional healthcare | 636 | 622 | 579 | 575 | 535 | ||||||||||||||||
| Continuing business | 3,213 | 3,260 | 3,217 | 3,284 | 2,631 | ||||||||||||||||
| Divested products | – | – | – | – | 19 | ||||||||||||||||
| 3,213 | 3,260 | 3,217 | 3,284 | 2,650 | |||||||||||||||||
Pharmaceutical turnover includes co-promotion income.
| Consumer Healthcare turnover | 2007 | 2006 | 2005 | 2004 | 2003 | |||||
| £m | £m | £m | £m | £m | ||||||
| OTC medicines | 1,718 | 1,496 | 1,437 | 1,400 | 1,472 | |||||
| Oral care | 1,049 | 993 | 943 | 913 | 915 | |||||
| Nutritional healthcare | 716 | 658 | 619 | 573 | 569 | |||||
| 3,483 | 3,147 | 2,999 | 2,886 | 2,956 | ||||||
| 166 | GSK Annual Report 2007 |
| INVESTOR INFORMATION | |
| Financial record | |
| Financial record | |
| continued | |
| Financial results - total | 2007 | 2006 | 2005 | 2004 | 2003 | |||||
| £m | £m | £m | £m | £m | ||||||
| Turnover | 22,716 | 23,225 | 21,660 | 19,986 | 21,070 | |||||
| Operating profit | 7,593 | 7,808 | 6,874 | 5,756 | 6,050 | |||||
| Profit before taxation | 7,452 | 7,799 | 6,732 | 5,779 | 5,954 | |||||
| Profit after taxation | 5,310 | 5,498 | 4,816 | 4,022 | 4,308 | |||||
| pence | pence | pence | pence | pence | ||||||
| Basic earnings per share | 94.4 | p | 95.5 | p | 82.6 | p | 68.1 | p | 72.3 | p |
| Diluted earnings per share | 93.7 | p | 94.5 | p | 82.0 | p | 68.0 | p | 72.1 | p |
| Financial | 2007 | |
| £m | ||
| Turnover | 22,716 | |
| Operating profit | 7,931 | |
| Profit before taxation | 7,790 | |
| Profit after taxation | 5,571 | |
| pence | |||
| Adjusted earnings per share | 99.1 | p | |
| Adjusted diluted earnings per share | 98.3 | p | |
| millions | millions | millions | millions | millions | ||||||
| Weighted average number of shares in issue: | ||||||||||
| Basic | 5,524 | 5,643 | 5,674 | 5,736 | 5,806 | |||||
| Diluted | 5,567 | 5,700 | 5,720 | 5,748 | 5,824 | |||||
| % | % | % | % | % | ||||||
| Return on capital employed | 76.2 | 90.6 | 99.7 | 100.2 | 116.6 | |||||
Return on capital employed is calculated as total profit before taxation as a percentage of average capital employed over the year.
| Balance sheet | 2007 | 2006 | 2005 | 2004 | 2003 | |||||
| £m | £m | £m | £m | £m | ||||||
| Non-current assets | 17,377 | 14,561 | 14,021 | 12,164 | 11,622 | |||||
| Current assets | 13,626 | 10,992 | 13,177 | 10,780 | 10,298 | |||||
| Total assets | 31,003 | 25,553 | 27,198 | 22,944 | 21,920 | |||||
| Current liabilities | (10,345 | ) | (7,265 | ) | (9,511 | ) | (8,564 | ) | (8,314 | ) |
| Non-current liabilities | (10,748 | ) | (8,640 | ) | (10,117 | ) | (8,443 | ) | (8,008 | ) |
| Total liabilities | (21,093 | ) | (15,905 | ) | (19,628 | ) | (17,007 | ) | (16,322 | ) |
| Net assets | 9,910 | 9,648 | 7,570 | 5,937 | 5,598 | |||||
| Shareholders’ equity | 9,603 | 9,386 | 7,311 | 5,724 | 4,917 | |||||
| Minority interests | 307 | 262 | 259 | 213 | 681 | |||||
| Total equity | 9,910 | 9,648 | 7,570 | 5,937 | 5,598 | |||||
| GSK Annual Report 2007 | |
| Statutory results | 2003 | 2002 | 2001 | 2000 | |||||||
| 2004 | (restated) | (restated) | (restated) | (restated) | |||||||
| £m | £m | £m | £m | £m | |||||||
| Turnover | 20,359 | 21,441 | 21,212 | 20,489 | 18,079 | ||||||
| Operating profit | 6,090 | 6,376 | 5,569 | 4,701 | 4,836 | ||||||
| Profit before taxation | 6,119 | 6,313 | 5,524 | 4,484 | 6,136 | ||||||
| Earnings (profit attributable to shareholders) | 4,302 | 4,478 | 3,930 | 3,027 | 4,204 | ||||||
| Dividends | (2,402 | ) | (2,374 | ) | (2,346 | ) | (2,356 | ) | (2,097 | ) | |
| Retained profit | 1,900 | 2,104 | 1,584 | 671 | 2,107 | ||||||
| Basic earnings per share (p) | 75.0 | 77.1 | 66.5 | 49.9 | 69.3 | ||||||
| Diluted earnings per share | 74.8 | 76.9 | 66.3 | 49.5 | 68.5 | ||||||
| Weighted average number of shares in issues: | |||||||||||
| Basic | 5,736 | 5,806 | 5,912 | 6,064 | 6,065 | ||||||
| Diluted | 5,748 | 5,824 | 5,934 | 6,116 | 6,134 | ||||||
| Return on capital employed (per cent) | 101.9 | 120.8 | 110.6 | 75.6 | 94.0 | ||||||
| Return on capital employed is calculated as statutory profit before taxation as a percentage of average capital employed over the year. | |||||||||||
| Merger, restructuring and disposal of subsidiaries | |||||||||||
| Manufacturing and other restructuring | – | (83 | ) | (121 | ) | (162 | ) | (171 | ) | ||
| Merger costs and product divestments | – | (286 | ) | (840 | ) | (1,069 | ) | 895 | |||
| Other items | – | (21 | ) | (50 | ) | (421 | ) | (22 | ) | ||
| (Loss)/profit before taxation | – | (390 | ) | (1,011 | ) | (1,652 | ) | 702 | |||
| (Loss)/profit attributable to shareholders | – | (281 | ) | (712 | ) | (1,330 | ) | 452 | |||
| Business performance results | |||||||||||
| Turnover | 20,359 | 21,441 | 21,212 | 20,489 | 18,079 | ||||||
| R&D expenditure | 2,839 | 2,770 | 2,732 | 2,555 | 2,510 | ||||||
| per cent of sales | 14% | 13% | 13% | 12% | 14% | ||||||
| Trading profit | 6,150 | 6,904 | 6,712 | 6,041 | 5,061 | ||||||
| per cent of sales | 30% | 32% | 32% | 30% | 28% | ||||||
| Net interest payable | (203 | ) | (161 | ) | (141 | ) | (88 | ) | (182 | ) | |
| Profit before taxation | 6,119 | 6,703 | 6,535 | 6,157 | 5,362 | ||||||
| Adjusted earnings (profit attributable to shareholders) | 4,302 | 4,759 | 4,642 | 4,371 | 3,686 | ||||||
During the years 2000 to 2003, business performance was the primary performance measure used by management and was presented after excluding merger items, integration and restructuring costs and disposals of business. Management believes that exclusion of these items provides a better comparison of the way in which the business was managed and gives an indication of the performance of the Group in terms of those elements of revenue and expenditure which local management was able to influence. This information, which is provided in addition to the statutory results prepared under UK GAAP, is given to assist shareholders to gain a clearer understanding of the underlying performance of the business and to increase comparability for the periods presented. Statutory results include these items. For 2004, with the completion of these programmes, the Group is reporting results on a statutory basis only.
| Amounts in accordance with US GAAP | 2004 | 2003 | 2002 | 2001 | 2000 | ||||||
| £m | £m | £m | £m | £m | |||||||
| Turnover | 19,986 | 21,117 | 21,212 | 20,489 | 9,559 | ||||||
| Net income/(loss) | 2,732 | 2,420 | 413 | (143 | ) | (5,228 | ) | ||||
| Basic net income/(loss) per share (pence) | 47.6 | 41.7 | p | 7.0 | p | (2.4 | )p | (145.6 | )p | ||
| Diluted net income/(loss) per share (pence) | 47.5 | 41.6 | p | 7.0 | p | (2.4 | )p | (145.6 | )p | ||
| The information below presents US GAAP net income/(loss) and net income/(loss) per share as if the results for the years ended 31st December 2000 and 2001 were adjusted to reverse the amortisation expense for goodwill and indefinite-lived intangible assets, that is, as if SFAS 142 had also applied in those years. | |||||||||||
| Adjusted net income/(loss) | 1,456 | (4,658 | ) | ||||||||
| Adjusted basic net income/(loss) per share (pence) | 24.0 | p | (129.7 | )p | |||||||
| Adjusted diluted net income/(loss) per share (pence) | 23.8 | p | (129.7 | )p | |||||||
| Financial record | |
| Financial record | |
| continued | |
Number of employees
| Balance sheet | |||||||||||
| 2003 | 2002 | 2001 | 2000 | ||||||||
| Net assets | 2004 | (restated) | (restated) | (restated) | (restated) | ||||||
| £m | £m | £m | £m | £m | |||||||
| Fixed assets | 8,945 | 8,575 | 8,752 | 8,984 | 8,005 | ||||||
| Other assets and liabilities | (759 | ) | (1,123 | ) | (1,770 | ) | (1,538 | ) | (881 | ) | |
| Net operating assets | 8,186 | 7,452 | 6,982 | 7,446 | 7,124 | ||||||
| Net debt | (1,984 | ) | (1,648 | ) | (2,335 | ) | (2,101 | ) | (611 | ) | |
| Net assets | 6,202 | 5,804 | 4,647 | 5,345 | 6,513 | ||||||
| Capital employed | |||||||||||
| Share capital and share premium | 1,788 | 1,751 | 1,730 | 1,713 | 1,586 | ||||||
| Other reserves | 4,137 | 3,308 | 2,110 | 2,770 | 3,683 | ||||||
| Equity shareholders’ funds | 5,925 | 5,059 | 3,840 | 4,483 | 5,269 | ||||||
| Minority interests | 277 | 745 | 807 | 862 | 1,244 | ||||||
| 6,202 | 5,804 | 4,647 | 5,345 | 6,513 | |||||||
| Capital expenditure (tangible fixed assets) | 993 | 870 | 1,027 | 1,113 | 1,018 | ||||||
| Amounts in accordance with US GAAP | 2004 | 2003 | 2002 | 2001 | 2000 | ||||||
| £m | £m | £m | £m | £m | |||||||
| Total assets | 55,841 | 56,400 | 57,671 | 61,341 | 65,786 | ||||||
| Net assets | 34,429 | 34,861 | 35,729 | 40,969 | 46,239 | ||||||
| Shareholders’ equity | 34,042 | 34,116 | 34,922 | 40,107 | 44,995 | ||||||
| Number of employees | |||||||||||
| 2004 | 2003 | 2002 | 2001 | 2000 | |||||||
| USA | 23,782 | 24,036 | 23,527 | 23,613 | 22,745 | ||||||
| Europe | 44,679 | 44,559 | 46,028 | 46,508 | 45,929 | ||||||
| International: | |||||||||||
| Asia Pacific | 16,109 | 18,373 | 17,289 | 18,364 | 19,058 | ||||||
| Japan | 2,965 | 2,842 | 2,952 | 2,985 | 3,165 | ||||||
| Latin America | 5,603 | 5,916 | 6,876 | 7,800 | 7,704 | ||||||
| Middle East, Africa | 5,134 | 3,400 | 5,973 | 6,344 | 7,133 | ||||||
| Canada | 1,747 | 1,793 | 1,854 | 1,856 | 1,783 | ||||||
| International | 31,558 | 32,324 | 34,944 | 37,349 | 38,843 | ||||||
| 100,019 | 100,919 | 104,499 | 107,470 | 107,517 | |||||||
| Manufacturing | 31,143 | 32,459 | 35,503 | 36,849 | 35,681 | ||||||
| Selling | 44,646 | 43,978 | 43,994 | 44,499 | 43,325 | ||||||
| Administration | 9,193 | 9,550 | 10,378 | 11,081 | 11,980 | ||||||
| Research and development | 15,037 | 14,932 | 14,624 | 15,041 | 16,531 | ||||||
| 100,019 | 100,919 | 104,499 | 107,470 | 107,517 | |||||||
| 2007 | 2006 | 2005 | 2004 | 2003 | |||||||
| USA | 24,838 | 24,726 | 23,822 | 23,782 | 24,036 | ||||||
| Europe | 46,869 | 45,758 | 43,999 | 44,679 | 44,559 | ||||||
| International: | |||||||||||
| Asia Pacific | 17,525 | 17,570 | 15,991 | 16,109 | 18,373 | ||||||
| Japan | 3,284 | 3,195 | 3,098 | 2,965 | 2,842 | ||||||
| Middle East, Africa | 3,156 | 3,204 | 5,682 | 5,134 | 3,400 | ||||||
| Latin America | 5,249 | 5,856 | 5,664 | 5,603 | 5,916 | ||||||
| Canada | 2,562 | 2,386 | 2,472 | 1,747 | 1,793 | ||||||
| International | 31,776 | 32,211 | 32,907 | 31,558 | 32,324 | ||||||
| 103,483 | 102,695 | 100,728 | 100,019 | 100,919 | |||||||
| Manufacturing | 33,995 | 33,235 | 31,615 | 31,143 | 32,459 | ||||||
| Selling | 44,499 | 44,484 | 44,393 | 44,646 | 43,978 | ||||||
| Administration | 8,960 | 9,024 | 9,225 | 9,193 | 9,550 | ||||||
| Research and development | 16,029 | 15,952 | 15,495 | 15,037 | 14,932 | ||||||
| 103,483 | 102,695 | 100,728 | 100,019 | 100,919 | |||||||
The number of employees is the number of permanent employed staff at the end of the financial period. It excludes those employees who are employed and managed by GlaxoSmithKlineGSK on a contract basis.
Exchange rates
As a guide to holders of ADRs, the following tables set out, for the periods indicated, information on the exchange rate of US dollars for sterlingSterling as reported by the Federal Reserve Bank of New York (‘noon buying rate’).
| Average | 1.84 | 1.63 | 1.51 | 1.44 | 1.51 | ||||||||
| The average rate for the year is calculated as the average of the noon buying rates on the last day of each month during the year. | |||||||||||||
| Feb | Jan | Dec | Nov | Oct | Sept | ||||||||
| 2005 | 2005 | 2004 | 2004 | 2004 | 2004 | ||||||||
| High | 1.91 | 1.91 | 1.95 | 1.91 | 1.84 | 1.81 | |||||||
| Low | 1.86 | 1.86 | 1.91 | 1.83 | 1.78 | 1.77 | |||||||
| The noon buying rate on 25th February 2005 was £1= US$1.91. | |||||||||||||
| 2007 | 2006 | 2005 | 2004 | 2003 | ||||||
| Average | 2.00 | 1.85 | 1.81 | 1.84 | 1.63 | |||||
The average rate for the year is calculated as the average of the noon buying rates on the last day of each month during the year.
| Feb | Jan | Dec | Nov | Oct | Sept | |||||||
| 2008 | 2008 | 2007 | 2007 | 2007 | 2007 | |||||||
| High | 1.98 | 1.99 | 2.07 | 2.11 | 2.08 | 2.04 | ||||||
| Low | 1.94 | 1.95 | 1.98 | 2.05 | 2.03 | 1.99 | ||||||
The noon buying rate on 22nd February 2008 was £1 = US$1.97.
| 168 | GSK Annual Report 2007 |
Financial information under International Financial Reporting Standards (IFRS)
Background
The IFRS projectIn June 2002, the Council of the European Union adopted a Regulation requiring listed companies in its Member States to prepare their consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) from 2005. The first GlaxoSmithKline Annual Report prepared under IFRS will be that for the year ending 31st December 2005. The first financial results announcement prepared in accordance with IFRS will be that for the first quarter of 2005.
The Group’s project to convert its financial reporting from UK GAAP to IFRS has now been completed, subject to any changes in standards and pronouncements. A training programme has been rolled out to all finance staff worldwide and the adjusted historical data, which will provide the comparative information under IFRS in 2005, has been prepared.
The unaudited consolidated results of GlaxoSmithKline plc converted from the current UK GAAP basis onto an IFRS basis for 2003 and 2004 are presented on pages 170 to 173. As 2003 will be the earliest year for which full IFRS financial statements will be presented in the Annual Report 2005, the transition date to IFRS for GlaxoSmithKline is 1st January 2003. Normally accounting changes of this nature would require full retrospective application, but under the IFRS transitional rules, certain adjustments only have to be applied with effect from the transition date of 1st January 2003.
Basis of preparation of dataThe IFRS financial information has been prepared on the basis of all IFRS and Standing Interpretations Committee (SIC) and International Financial Reporting Interpretations Committee (IFRIC) interpretations issued by the IASB effective for 2005 reporting.
GlaxoSmithKline has chosen to adopt the IASB’s amendments to IAS 19, Employee Benefits, early. This permits actuarial gains and losses, differences between the expected and actual returns and the effect of changes in actuarial assumptions to be recognised in the Statement of recognised income and expense.
The financial information presented under IFRS is unaudited.
IFRS 1 exemptionsIFRS 1, First-Time Adoption of International Financial Reporting Standards, permits those companies adopting IFRS for the first time to take some exemptions from the full requirements of IFRS in the transition period. GlaxoSmithKline intends to take the following key exemptions:
The IFRS financial information has been prepared on the basis of taking these exemptions.
Financial instrumentsGlaxoSmithKline intends to adopt IAS 39 in full. However, one of the exemptions available under IFRS 1 relaxes the requirement for comparative information presented in the Annual Report 2005 to comply with IAS 32 and IAS 39. GlaxoSmithKline intends to take advantage of this exemption, and so, in 2003 and 2004, financial instruments will be accounted for and presented on a UK GAAP basis.
On 1st January 2005 there was an adjustment to the opening balance sheet to reflect the movements from the UK GAAP carrying values to the IAS 32 and IAS 39 values, which for many financial instruments will be fair value.
The financial instruments concerned are:
| |||
If the IAS 39 valuation rules had been applied in 2004 there would have been a charge to profit before tax, the largest elements of which arise from the Quest collar (£42 million; 2003 – £42 million) and the Theravance put and call options (£53 million; 2003 – nil). Valuations are inherently unpredictable and changes in the fair values of financial instruments could have a material impact on the future results and financial position of GlaxoSmithKline.
IFRS accounting policies
The following IFRS accounting policies are expected to be applied by GlaxoSmithKline plc in its consolidated financial statements for 2005.
ConsolidationThe consolidated Financial statements include:
The Financial statements of undertakings consolidated are made up to 31st December.
Entities over which the Group has the ability to exercise control are accounted for as subsidiaries; where the Group has the ability to exercise joint control, they are accounted for as joint ventures, and where the Group has the ability to exercise significant influence, they are accounted for as associates.
Interests acquired in entities are consolidated from the effective date of acquisition and interests sold are consolidated up to the date of disposal.
Transactions and balances between subsidiaries are eliminated; no profit is taken on sales between subsidiaries or on sales to joint ventures and associates until the products are sold to customers outside the Group. Deferred tax relief on unrealised intra-Group profit is accounted for only to the extent that it is considered recoverable.
Goodwill arising on the acquisition of interests in subsidiaries, joint ventures and associates, representing the excess of the purchase consideration over the Group’s share of the fair values of the identifiable assets, liabilities and contingent liabilities acquired, is capitalised as a separate item in the case of subsidiaries and as part of the cost of investment in the case of joint ventures and associates. Goodwill is denominated in the currency of the operation acquired. In the case of acquisitions prior to 1998, goodwill was written off directly to equity; on a subsequent disposal of assets from such acquisitions, any related goodwill remains in equity and is not charged to the consolidated income statement.
The results and assets and liabilities of associates and joint ventures are incorporated into the consolidated financial statements using the equity method of accounting.
Assets and liabilities of overseas subsidiaries, associates and joint ventures including related goodwill, are translated into sterling at rates of exchange ruling at the balance sheet date. The results and cash flows of overseas subsidiaries, associates and joint ventures are translated into sterling using average rates of exchange. Exchange adjustments arising when the opening net assets and the profits for the year retained by overseas subsidiaries, associates and joint ventures are translated into sterling, less exchange differences arising on related foreign currency borrowings which hedge the Group’s net investment in these operations, are taken to a separate component of equity.
When translating into sterling the assets, liabilities, results and cash flows of overseas subsidiaries, associates and joint ventures which are reported in currencies of hyper-inflationary economies, adjustments are made to reflect current price levels. Any loss on net monetary assets is charged to the consolidated income statement.
Foreign currency transactionsForeign currency transactions by Group companies are booked in local currency at the exchange rate ruling on the date of transaction. Foreign currency assets and liabilities are retranslated into local currency at rates of exchange ruling at the balance sheet date. Exchange differences are included in the income statement.
RevenueRevenue is recognised in the income statement when goods or services are supplied or made available to external customers against orders received and when title and risk of loss passes to the customer. Turnover represents net invoice value after the deduction of discounts and allowances given and accruals for estimated future rebates and returns. The methodology and assumptions used to estimate rebates and returns are monitored and adjusted regularly in the light of contractual and historical information and past experience. Turnover also includes co-promotion income where the Group records its share of the revenue but no related cost of sales. Value added tax and other sales taxes are excluded from revenue.
ExpenditureExpenditure is recognised in respect of goods and services received when supplied in accordance with contractual terms. Provision is made when an obligation exists for a future liability in respect of a past event and where the amount of the obligation can be reliably estimated. Advertising and promotion expenditure is charged to the income statement as incurred. Shipment costs on intercompany transfers are charged to cost of sales; distribution costs on sales to customers are included in selling, general and administrative expenditure. Restructuring costs are recognised in respect of the direct expenditures of a business reorganisation where the plans are sufficiently detailed and well advanced, and where appropriate communication to those affected has been undertaken at the balance sheet date.
Research and developmentResearch and development expenditure is charged to the income statement in the period in which it is incurred. Development expenditure is capitalised when the criteria for recognising an asset are met, usually at the point of regulatory filing in a major market. Property, plant and equipment used for research and development is depreciated in accordance with the Group’s policy.
Environmental expenditureEnvironmental expenditure related to existing conditions resulting from past or current operations and from which no current or future benefit is discernible is charged to the income statement. The Group recognises its liability on a site-by-site basis when it can be reliably estimated. This liability includes the Group’s portion of the total costs and also a portion of other potentially responsible parties’ costs when it is probable that they will not be able to satisfy their respective shares of the clean-up obligation. Recoveries of reimbursements are recorded as assets when virtually certain.
IFRS accounting policies continued
Pensions and other post-employment benefitsThe costs of providing pensions under defined benefit schemes are calculated using the projected unit credit method and spread over the period during which benefit is expected to be derived from the employees’ services, in accordance with the advice of qualified actuaries. Pension obligations are measured as the present value of estimated future cash flows discounted at rates reflecting the yields of high quality corporate bonds. Pension scheme assets are measured at fair value at the balance sheet date. Actuarial gains and losses, differences between the expected and actual returns, and the effect of changes in actuarial assumptions are recognised in the Statement of recognised income and expense in the year they arise.
The Group’s contributions to defined contribution plans are charged to the income statement as incurred.
The costs of other post-employment liabilities are calculated in a similar way to defined benefit pension schemes and spread over the period during which benefit is expected to be derived from the employees’ services, in accordance with the advice of qualified actuaries.
Legal and other disputesProvision is made for anticipated settlement costs where a reasonable estimate can be made of the likely outcome of legal or other disputes against the Group. In addition provision is made for legal or other expenses arising from claims received or other disputes. In respect of product liability claims related to products where there is sufficient history of claims made and settlements, an “incurred but not reported” (IBNR) actuarial technique is used to determine a reasonable estimate of the Group’s exposure to unasserted claims for those products and a provision is made on that basis. No provision is made for other unasserted claims or where an obligation exists under a dispute but it is not possible to make a reasonable estimate. Costs associated with claims made by the Group against third parties are charged to the income statement as they are incurred.
Employee share plansIncentives in the form of shares are provided to employees under share option and share award schemes. These options and awards are fair valued at their grant dates and the cost is charged to the income statement over the relevant vesting periods.
The Group provides finance to ESOP Trusts to purchase company shares on the open market to meet the obligation to provide shares when employees exercise their options or awards. Costs of running the ESOP Trusts are charged to the income statement. Shares held by the ESOP Trusts are deducted from other reserves and held at the value of the proceeds receivable from employees on exercise. If there is deemed to be a permanent impairment in value this is reflected by a transfer to retained earnings.
Property, plant and equipmentProperty, plant and equipment (PP&E) is stated at the cost of purchase or construction less provisions for depreciation and impairment. Financing costs are not capitalised.
Depreciation is calculated to write off the cost of PP&E, excluding freehold land, using the straight-line basis over its expected useful life. The normal expected useful lives of the major categories of PP&E are reviewed annually and are:
On disposal of PP&E, the cost and related accumulated depreciation and impairments are removed from the financial statements and the net amount, less any proceeds, is taken to the income statement.
LeasesLeasing agreements which transfer to the Group substantially all the benefits and risks of ownership of an asset are treated as finance leases, as if the asset had been purchased outright. The assets are included in PP&E or computer software and the capital elements of the leasing commitments are shown as obligations under finance leases. Assets held under finance leases are depreciated on a basis consistent with similar owned assets or the lease term if shorter. The interest element of the lease rental is included in the income statement. All other leases are operating leases and the annual rentals are included in the income statement on a straight-line basis over the lease term.
GoodwillGoodwill is stated at cost less impairments. Goodwill is deemed to have an indefinite useful life and is tested for impairment annually.
Where the fair value of the interest acquired in an entity’s assets, liabilities and contingent liabilities exceeds the consideration paid, this excess is recognised immediately as a gain in the income statement.
IFRS accounting policies continued
Intangible fixed assetsIntangible assets are stated at cost less provisions for amortisation and impairments.
Licences, patents, know-how and marketing rights separately acquired or acquired as part of a business combination are amortised over their estimated useful lives from the time they are available for use. The estimated useful lives for determining the amortisation charge are reviewed annually, and take into account the estimated time it takes to bring the compounds or products to market. Any development costs incurred by the Group and associated with acquired licences, patents, know-how or marketing rights are written off to the income statement when incurred, unless the criteria for recognition of an internally generated intangible asset are met.
Brands are valued independently as part of the fair value of businesses acquired from third parties where the brand has a value which is substantial and long-term and where the brands can be sold separately from the rest of the businesses acquired. Brands are amortised over their estimated useful lives, except where it is considered that the useful economic life is indefinite.
Prior to 1998, acquired minor brands and similar intangibles were eliminated in the Group balance sheet against reserves in the year of acquisition.
The costs of acquiring and developing computer software for internal use and internet sites for external use are capitalised as intangible fixed assets where the software or site supports a significant business system and the expenditure leads to the creation of a durable asset. ERP systems software is amortised over seven years and other computer software over three to five years.
Impairment of non-current assetsThe carrying values of all non-current assets are reviewed for impairment when there is an indication that the assets might be impaired. Additionally, goodwill, intangible assets with indefinite useful lives and intangible assets which are not yet available for use are tested for impairment annually. Any provision for impairment is charged to the income statement in the year concerned.
Investments in joint ventures and associatesInvestments in joint ventures and associates are carried in the consolidated balance sheet at the Group’s share of their net assets at date of acquisition and of their post-acquisition retained profits or losses together with any goodwill arising on the acquisition.
Available-for-sale investmentsAvailable-for-sale investments are initially recorded at cost and then remeasured at subsequent reporting dates to fair value. Unrealised gains and losses on available-for-sale investments are recognised directly in equity. On disposal or impairment of the investments, the gains and losses in equity are recycled into the income statement. Equity investments are recorded in non-current assets unless they are expected to be sold within one year.
InventoriesInventories are included in the financial statements at the lower of cost (including raw materials, direct labour, other direct costs and related production overheads) and net realisable value. Cost is generally determined on a first in, first out basis.
TaxationDeferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised.
Deferred tax is provided on temporary differences arising on investments in subsidiaries, associates and joint ventures, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future.
Deferred tax is provided using rates of tax that have been enacted or substantively enacted by the balance sheet date. Deferred tax liabilities and assets are not discounted.
Derivative financial instruments and hedging activitiesDerivative financial instruments are used to manage exposure to market risks from treasury operations. The principal derivative instruments used by GlaxoSmithKline are foreign currency swaps, interest rate swaps and forward foreign exchange contracts. The Group does not hold or issue derivative financial instruments for trading or speculative purposes.
Derivative financial instruments are initially recognised in the balance sheet at cost and then remeasured at subsequent reporting dates to fair value. Hedging derivatives are classified on inception as fair value hedges, cash flow hedges or net investment hedges.
Changes in the fair value of derivatives designated as fair value hedges are recorded in the income statement, with the changes in the fair value of the hedged asset or liability.
Changes in the fair value of derivatives designated as cash flow hedges are recognised in equity. Amounts deferred in equity are transferred to the income statement in line with the hedged forecast transaction.
Hedges of net investments in foreign entities are accounted for in a similar way to cash flow hedges.
Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised immediately in the income statement.
Debt instrumentsUnhedged debt instruments are stated at the amount of net proceeds, adjusted to amortise the issue costs of the debt over its term.
IFRS adjustmentsShare price
A summary of the principal differences between UK GAAP and IFRS as they apply to GlaxoSmithKline is set out below and the financial effect is shown on pages 170 to 173.
Customer allowancesThis adjustment is a reclassification between turnover and expenses with no profit or cash flow effect. IFRS has no detailed rules in relation to when certain marketing and promotional expenditure should be deducted from turnover rather than recorded as an expense. However, these rules do exist under US GAAP in EITF 01-09, Accounting for Consideration Given by a Vendor to a Customer, which requires most marketing, advertising, and promotion payments made to customers to be deducted from turnover. This has the most significant impact in the Consumer Healthcare business where payments to large retailers for in-store advertising, preferential shelf-space, product listings etc. are commonplace.
GlaxoSmithKline believes that this reflects best practice in revenue recognition and hence, in the absence of detailed guidance under IFRS, has decided to adopt a revenue recognition policy under IFRS in line with EITF 01-09. Therefore going forward there would be no difference between turnover reported under IFRS and turnover reported under US GAAP. This adjustment has no impact on profit before tax or EPS.
Share-based paymentsThe present UK GAAP approach to share-based payments is to record any intrinsic loss on grant suffered by the company. This means that for share options granted at the market price, there is no charge to the income statement. Where shares or options are granted at no cost to the employee (e.g. under long-term incentive plans) the income statement is charged with an amount equal to the market price on the date of the award, spread over the performance period (usually three years).
IFRS 2, Share-based Payment, and its UK GAAP equivalent FRS 20, Share-based Payment, both of which came into force in 2005, require the fair value of the equity instruments issued to be charged to the income statement. For share awards granted to senior executives, although the calculation is different, the resultant charge is not materially different from that under UK GAAP. The major difference arises in respect of share options; of the £368 million adjustment in 2003, some £350 million arises from the grant of share options at market price to approximately 12,000 employees. GlaxoSmithKline has chosen to recognise all unvested options and awards retrospectively.
GlaxoSmithKline receives a tax credit, as appropriate, which relates to share options and awards when exercised, based on the gains the holders make and dependant on the tax rules in the country in which the deduction is claimed. The deferred tax asset represents an estimate of future tax relief for this gain and is based on the potential gains available to the option or award holders at the balance sheet date. The movement in deferred tax asset from one balance sheet to the next may result in either a tax credit or a tax charge recorded in the income statement.
This adjustment reduces profit before tax in 2004 by £309 million (2003–£368 million), earnings by £314 million (2003–£344 million) and EPS by 5.5 pence (2003–5.9 pence).
The adjustment for share-based payments is expected to reduce to a more normal level of £200-£250 million by 2005. The considerably higher charge in 2004 and 2003 arises from two main factors. Relatively few share options were granted during 2000 when the GW/SB merger was being finalised, but then in 2001 there was a full“catch-up”grant early in the year followed by the normal annual grant in November 2001. In addition, the grants in 2001 were made at an average share price in excess of £18. These share options will become exercisable in 2004 and therefore fall out of the charge in 2005, when the charge will reflect more current share prices and more normal grant levels.
Coreg capitalisation and amortisationThe North American rights toCoregwere acquired at the time of the GW/SB merger as partial consideration for the required disposal of Kytril to Roche. Under UK GAAP this was accounted for as an exchange of assets with no value being attributed toCoregon the balance sheet. IFRS, however, requires the acquired rights toCoregto be added to intangible assets at their fair value on the date of acquisition of $400 million, and then amortised over their remaining useful life of eight years. This adjustment reduces 2004 profit before tax by £27 million (2003–£31 million) and EPS by 0.3 pence (2003–0.3 pence).
Other intangible assets amortisationUnder UK GAAP, GlaxoSmithKline amortises intangible assets over their estimated expected useful lives from acquisition, which can be up to a maximum of 15 years. IFRS only permits amortisation to commence when the asset becomes available for use, with annual impairment testing required before this point. GlaxoSmithKline has determined that the point at which amortisation of product-related assets commences under IFRS will normally be regulatory approval. The majority of GlaxoSmithKline’s intangible assets relates to the acquisition of rights to compounds in development and so has not reached the point at which amortisation commences. This has led to a reduction in the amortisation charge in the periods presented, which is likely to reverse in the future as these compounds reach regulatory approval and amortisation is then charged over a shorter period. Profit before tax in 2004 increases by £43 million (2003–£43 million) and EPS by 0.5 pence (2003–0.5 pence).
Goodwill amortisationUK GAAP requires goodwill to be amortised over its estimated expected useful life, which GlaxoSmithKline has determined to be normally no longer than 20 years. Under IFRS, however, goodwill is considered to have an indefinite life and so is not amortised, but is subject to annual impairment testing. This adjustment therefore reverses the goodwill amortisation charged under UK GAAP, including that recorded in the profit on share of associates line relating to the acquisition of the Group’s interest in Quest Diagnostics Inc. Under the business combinations exemption of IFRS 1, goodwill previously written off direct to reserves under UK GAAP is not recycled to the income statement on the disposal or part-disposal of the subsidiary or associate, as it would be under UK GAAP. The adjustment increases 2004 profit before tax by £38 million (2003–£26 million) and EPS by 0.7 pence (2003–0.4 pence).
IFRS adjustments continued
Pensions and other post-employment benefitsGlaxoSmithKline accounts under UK GAAP for pensions and other post-employment benefits (OPEBs) in accordance with SSAP 24, which spreads the costs of providing the benefits over the estimated average service lives of the employees. The additional FRS 17 disclosures give the pension fund surpluses and deficits and the liabilities for OPEBs based on the valuation methodologies required by that Standard.
IAS 19, Employee Benefits, takes a similar valuation approach to FRS 17, and in accordance with the transitional provisions of IFRS 1 the surpluses and deficits have been recognised on the balance sheet at the transition date of 1st January 2003. In addition, following an amendment to IAS 19 issued by the IASB in December 2004, it is permitted to recognise any movements in the surpluses or deficits immediately in balance sheets, but outside the income statement, in a similar way to FRS 17. This means that, in most cases, the balance sheet reflects the full surplus or deficit positions of the funds.
The Group’s policy is to charge out to the operating businesses the service cost element of the pension charge, which then gets reported within cost of sales, selling, general and administrative expenditure or research and development as appropriate, but not to charge out the element related to the funding deficit, which is all reported in Selling, general and administrative expenditure. Under IAS 19, the service cost element of the total charge is considerably higher than under SSAP 24 and the funding deficit element lower. This leads to an additional reclassification adjustment between the income statement expense headings.
In the USA, the recently enacted Medicare Prescription Drug, Improvement and Modernization Act is expected to lead to payments being received by GlaxoSmithKline from the US Government in respect of its employee healthcare plans. At present there is no clear consensus on how these receipts should be accounted for under IAS 19. GlaxoSmithKline has recognised these receipts as actuarial adjustments and so the impact of them is recognised in the balance sheet. This treatment would change if guidance is issued which requires a different accounting treatment.
The overall impact of the adjustments to pensions and OPEBs in 2004 is a decrease in profit before tax of £36 million (2003–increase of £11 million) and a decrease in EPS of 0.4 pence (2003–nil).
Share of profits of associatesUnder UK GAAP the share of profits of associates is reported within profit before tax for the Group. However, IFRS requires this share of profits to be the net profit attributable to the Group, i.e. after interest, tax and minority interests of the associate. This leads to a reclassification adjustment removing the share of the associates’interest, tax and minority interests from those lines in the income statement and netting them all together in the share of profits of associates line. This adjustment reduces 2004 profit before tax by £42 million (2003–£42 million) but does not affect EPS.
Deferred tax on intercompany profitUnder UK GAAP, deferred tax on the provision for intercompany profit held in inventory is calculated at the supplying company’s effective tax rate. IFRS, however, takes a balance sheet approach to the recognition of deferred tax which results in the tax rate of the company holding the inventory at the balance sheet date being applied to the provision. If the proportions of the Group’s inventory held in specific locations change significantly from one balance sheet date to the next there could be a significant change in the value of the deferred tax asset, which is reflected through the tax charge for the year.
Other adjustmentsThere are a number of other minor adjustments and reclassifications, including:
Cash flow statementThe move from UK GAAP to IFRS does not change any of the cash flows of the Group. The IFRS cash flow format is similar to UK GAAP but presents various cash flows in different categories and in a different order from the UK GAAP cash flow statement. All of the IFRS accounting adjustments net out within cash generated from operations except for the intangible assets reclassification and the inclusion of liquid investments with a maturity of less than three months on acquisition, together with related exchange adjustments, within cash and cash equivalents under IFRS.
| IFRS pharmaceutical turnover – total Group | ||||||||||||
12 months 2004 £m | 12 months 2003 £m | Q4 2004 £m | Q3 2004 £m | Q2 2004 £m | Q1 2004 £m | |||||||
| Respiratory | 4,394 | 4,390 | 1,167 | 1,065 | 1,080 | 1,082 | ||||||
| Seretide/Advair, | ||||||||||||
| Flixotide/Flovent, Serevent | 3,408 | 3,328 | 914 | 827 | 847 | 820 | ||||||
| Seretide/Advair | 2,441 | 2,192 | 662 | 604 | 598 | 577 | ||||||
| Flixotide/Flovent | 618 | 704 | 167 | 141 | 156 | 154 | ||||||
| Serevent | 349 | 432 | 85 | 82 | 93 | 89 | ||||||
| Flixonase/Flonase | 578 | 594 | 143 | 145 | 133 | 157 | ||||||
| Central Nervous System | 3,462 | 4,446 | 836 | 835 | 877 | 914 | ||||||
| Seroxat/Paxil | 1,063 | 1,877 | 242 | 246 | 284 | 291 | ||||||
| Paxil IR | 667 | 1,490 | 144 | 144 | 189 | 190 | ||||||
| Paxil CR | 396 | 387 | 98 | 102 | 95 | 101 | ||||||
| Wellbutrin | 751 | 953 | 164 | 173 | 193 | 221 | ||||||
| Wellbutrin IR, SR | 284 | 883 | 30 | 45 | 76 | 133 | ||||||
| Wellbutrin XL | 467 | 70 | 134 | 128 | 117 | 88 | ||||||
| Imigran/Imitrex | 682 | 759 | 177 | 175 | 158 | 172 | ||||||
| Lamictal | 677 | 549 | 181 | 172 | 171 | 153 | ||||||
| Requip | 116 | 98 | 32 | 29 | 29 | 26 | ||||||
| Anti-virals | 2,359 | 2,345 | 605 | 597 | 595 | 562 | ||||||
| HIV | 1,462 | 1,505 | 374 | 372 | 368 | 348 | ||||||
| Combivir | 570 | 588 | 146 | 144 | 141 | 139 | ||||||
| Trizivir | 322 | 375 | 75 | 79 | 87 | 81 | ||||||
| Epivir | 294 | 293 | 73 | 73 | 77 | 71 | ||||||
| Ziagen | 155 | 167 | 38 | 42 | 37 | 38 | ||||||
| Retrovir | 43 | 45 | 11 | 11 | 11 | 10 | ||||||
| Agenerase, Lexiva | 63 | 31 | 21 | 18 | 15 | 9 | ||||||
| Herpes | 718 | 668 | 183 | 179 | 182 | 174 | ||||||
| Valtrex | 571 | 498 | 146 | 147 | 145 | 133 | ||||||
| Zovirax | 147 | 170 | 37 | 32 | 37 | 41 | ||||||
| Zeffix | 130 | 129 | 34 | 33 | 33 | 30 | ||||||
| Anti-bacterials | 1,547 | 1,800 | 393 | 350 | 382 | 422 | ||||||
| Augmentin | 708 | 825 | 170 | 156 | 178 | 204 | ||||||
| Augmentin IR | 533 | 584 | 135 | 125 | 134 | 139 | ||||||
| Augmentin ES | 74 | 135 | 5 | 14 | 22 | 33 | ||||||
| Augmentin XR | 101 | 106 | 30 | 17 | 22 | 32 | ||||||
| Zinnat/Ceftin | 205 | 232 | 56 | 42 | 48 | 59 | ||||||
| Metabolic | 1,251 | 1,077 | 324 | 320 | 338 | 269 | ||||||
| Avandia/Avandamet | 1,114 | 929 | 287 | 284 | 306 | 237 | ||||||
| Vaccines | 1,194 | 1,121 | 349 | 328 | 278 | 239 | ||||||
| Hepatitis | 405 | 417 | 109 | 101 | 105 | 90 | ||||||
| Infanrix/Pediarix | 356 | 336 | 99 | 95 | 86 | 76 | ||||||
| Oncology and emesis | 934 | 1,000 | 229 | 246 | 237 | 222 | ||||||
| Zofran | 763 | 774 | 190 | 201 | 192 | 180 | ||||||
| Hycamtin | 99 | 110 | 24 | 26 | 25 | 24 | ||||||
| Cardiovascular and urogenital | 932 | 770 | 280 | 232 | 220 | 200 | ||||||
| Coreg | 432 | 361 | 115 | 110 | 113 | 94 | ||||||
| Levitra | 49 | 37 | 12 | 11 | 9 | 17 | ||||||
| Avodart | 64 | 19 | 23 | 17 | 14 | 10 | ||||||
| Other | 1,027 | 1,165 | 292 | 229 | 248 | 258 | ||||||
| Zantac | 273 | 328 | 69 | 66 | 70 | 68 | ||||||
| Total | 17,100 | 18,114 | 4,475 | 4,202 | 4,255 | 4,168 | ||||||
| Pharmaceutical turnover includes co-promotion income. |
| IFRS Consolidated income statement – statutory | 12 months 2004 | 12 months 2003 | |||||||||||||||
| UK GAAP | Adjustments | IFRS | Growth | UK GAAP | Adjustments | IFRS | |||||||||||
| £m | £m | £m | £% | CER% | £m | £m | £m | ||||||||||
| Turnover | 20,359 | (373 | ) | 19,986 | (5 | ) | 1 | 21,441 | (371 | ) | 21,070 | ||||||
| Cost of sales | (4,309 | ) | (51 | ) | (4,360 | ) | (5 | ) | – | (4,544 | ) | (33 | ) | (4,577 | ) | ||
| Selling, general and administrative expenditure | (7,061 | ) | 156 | (6,905 | ) | (7 | ) | (4 | ) | (7,597 | ) | 145 | (7,452 | ) | |||
| Research and development expenditure | (2,839 | ) | (65 | ) | (2,904 | ) | 1 | 8 | (2,791 | ) | (74 | ) | (2,865 | ) | |||
| Operating costs | (14,209 | ) | 40 | (14,169 | ) | (14,932 | ) | 38 | (14,894 | ) | |||||||
| Trading profit | 6,150 | (333 | ) | 5,817 | (6 | ) | 5 | 6,509 | (333 | ) | 6,176 | ||||||
| Other operating income/(expense) | (60 | ) | (1 | ) | (61 | ) | (133 | ) | 7 | (126 | ) | ||||||
| Operating profit | 6,090 | (334 | ) | 5,756 | (5 | ) | 6 | 6,376 | (326 | ) | 6,050 | ||||||
| Share of profits/(losses) of joint ventures | |||||||||||||||||
| and associates | 95 | (35 | ) | 60 | 93 | (36 | ) | 57 | |||||||||
| Disposal of interests in associates | 138 | 11 | 149 | – | – | – | |||||||||||
| Disposal of businesses | (1 | ) | 1 | – | 5 | – | 5 | ||||||||||
| Profit before interest | 6,322 | (357 | ) | 5,965 | 6,474 | (362 | ) | 6,112 | |||||||||
| Finance costs, net | (203 | ) | 17 | (186 | ) | (161 | ) | 8 | (153 | ) | |||||||
| Profit on ordinary activities before taxation | 6,119 | (340 | ) | 5,779 | (3 | ) | 9 | 6,313 | (354 | ) | 5,959 | ||||||
| Taxation | (1,701 | ) | (56 | ) | (1,757 | ) | (1,729 | ) | 78 | (1,651 | ) | ||||||
| Profit on ordinary activities after taxation | 4,418 | (396 | ) | 4,022 | (7 | ) | 4 | 4,584 | (276 | ) | 4,308 | ||||||
| Equity minority interests | (114 | ) | 2 | (112 | ) | (94 | ) | (1 | ) | (95 | ) | ||||||
| Preference share dividends | (2 | ) | – | (2 | ) | (12 | ) | – | (12 | ) | |||||||
| Earnings (Profit attributable to shareholders) | 4,302 | (394 | ) | 3,908 | (7 | ) | 4 | 4,478 | (277 | ) | 4,201 | ||||||
| Basic earnings per share | 75.0 | p | (6.9 | )p | 68.1p | (6 | ) | 6 | 77.1 | p | (4.8 | )p | 72.3 | p | |||
| IFRS Consolidated income statement – business performance | |||||||||||||||||
| 12 months 2004 | 12 months 2003 | ||||||||||||||||
| UK GAAP | Adjustments | IFRS | Growth | UK GAAP | Adjustments | IFRS | |||||||||||
| £m | £m | £m | £% | CER% | £m | £m | £m | ||||||||||
| Turnover | 20,359 | (373 | ) | 19,986 | (5 | ) | 1 | 21,441 | (371 | ) | 21,070 | ||||||
| Cost of sales | (4,309 | ) | (51 | ) | (4,360 | ) | 3 | 9 | (4,188 | ) | (33 | ) | (4,221 | ) | |||
| Selling, general and administrative expenditure | (7,061 | ) | 156 | (6,905 | ) | (7 | ) | (3 | ) | (7,579 | ) | 145 | (7,434 | ) | |||
| Research and development expenditure | (2,839 | ) | (65 | ) | (2,904 | ) | 2 | 9 | (2,770 | ) | (74 | ) | (2,844 | ) | |||
| Operating costs | (14,209 | ) | 40 | (14,169 | ) | (14,537 | ) | 38 | (14,499 | ) | |||||||
| Trading profit | 6,150 | (333 | ) | 5,817 | (11 | ) | (1 | ) | 6,904 | (333 | ) | 6,571 | |||||
| Other operating income/(expense) | (60 | ) | (1 | ) | (61 | ) | (133 | ) | 7 | (126 | ) | ||||||
| Operating profit | 6,090 | (334 | ) | 5,756 | (11 | ) | – | 6,771 | (326 | ) | 6,445 | ||||||
| Share of profits/(losses) of joint ventures | |||||||||||||||||
| and associates | 95 | (35 | ) | 60 | 93 | (36 | ) | 57 | |||||||||
| Disposal of interests in associates | 138 | 11 | 149 | – | – | – | |||||||||||
| Disposal of businesses | (1 | ) | 1 | – | – | – | – | ||||||||||
| Profit before interest | 6,322 | (357 | ) | 5,965 | 6,864 | (362 | ) | 6,502 | |||||||||
| Finance costs, net | (203 | ) | 17 | (186 | ) | (161 | ) | 8 | (153 | ) | |||||||
| Profit on ordinary activities before taxation | 6,119 | (340 | ) | 5,779 | (9 | ) | 2 | 6,703 | (354 | ) | 6,349 | ||||||
| Taxation | (1,701 | ) | (56 | ) | (1,757 | ) | (1,838 | ) | 78 | (1,760 | ) | ||||||
| Profit on ordinary activities after taxation | 4,418 | (396 | ) | 4,022 | (12 | ) | (2 | ) | 4,865 | (276 | ) | 4,589 | |||||
| Equity minority interests | (114 | ) | 2 | (112 | ) | (94 | ) | (1 | ) | (95 | ) | ||||||
| Preference share dividends | (2 | ) | – | (2 | ) | (12 | ) | – | (12 | ) | |||||||
| Adjusted earnings (Profit attributable to | |||||||||||||||||
| shareholders) | 4,302 | (394 | ) | 3,908 | (13 | ) | (2 | ) | 4,759 | (277 | ) | 4,482 | |||||
| Adjusted earnings per share | 75.0 | p | (6.9 | )p | 68.1 | p | (12 | ) | (1 | ) | 82.0 | p | (4.8 | )p | 77.2 | p | |
| IFRS Consolidated income statement – statutory | |||||||||||||||||||
| Q4 2004 | 9 months 2004 | Q3 2004 | |||||||||||||||||
| UK GAAP | Adjustments | IFRS | UK GAAP | Adjustments | IFRS | UK GAAP | Adjustments | IFRS | |||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||
| Turnover | 5,333 | (97 | ) | 5,236 | 15,026 | (276 | ) | 14,750 | 5,019 | (95 | ) | 4,924 | |||||||
| Cost of sales | (1,158 | ) | (18 | ) | (1,176 | ) | (3,151 | ) | (33 | ) | (3,184 | ) | (1,096 | ) | (9 | ) | (1,105 | ) | |
| Selling, general and administrative expenditure | (2,047 | ) | 42 | (2,005 | ) | (5,014 | ) | 114 | (4,900 | ) | (1,647 | ) | 54 | (1,593 | ) | ||||
| Research and development expenditure | (846 | ) | (7 | ) | (853 | ) | (1,993 | ) | (58 | ) | (2,051 | ) | (682 | ) | (14 | ) | (696 | ) | |
| Operating costs | (4,051 | ) | 17 | (4,034 | ) | (10,158 | ) | 23 | (10,135 | ) | (3,425 | ) | 31 | (3,394 | ) | ||||
| Trading profit | 1,282 | (80 | ) | 1,202 | 4,868 | (253 | ) | 4,615 | 1,594 | (64 | ) | 1,530 | |||||||
| Other operating income/(expense) | 40 | (1 | ) | 39 | (100 | ) | – | (100 | ) | (33 | ) | – | (33 | ) | |||||
| Operating profit | 1,322 | (81 | ) | 1,241 | 4,768 | (253 | ) | 4,515 | 1,561 | (64 | ) | 1,497 | |||||||
| Share of profits/(losses) of joint ventures and | |||||||||||||||||||
| associates | 23 | (7 | ) | 16 | 72 | (28 | ) | 44 | 22 | (8 | ) | 14 | |||||||
| Disposal of interests in associates | 97 | 7 | 104 | 41 | 4 | 45 | – | – | – | ||||||||||
| Disposal of business | (1 | ) | 1 | – | – | – | – | – | – | – | |||||||||
| Profit before interest | 1,441 | (80 | ) | 1,361 | 4,881 | (277 | ) | 4,604 | 1,583 | (72 | ) | 1,511 | |||||||
| Finance costs, net | (51 | ) | 12 | (39 | ) | (152 | ) | 5 | (147 | ) | (61 | ) | 1 | (60 | ) | ||||
| Profit on ordinary activities before taxation | 1,390 | (68 | ) | 1,322 | 4,729 | (272 | ) | 4,457 | 1,522 | (71 | ) | 1,451 | |||||||
| Taxation | (401 | ) | (120 | ) | (521 | ) | (1,300 | ) | 64 | (1,236 | ) | (418 | ) | 14 | (404 | ) | |||
| Profit on ordinary activities after taxation | 989 | (188 | ) | 801 | 3,429 | (208 | ) | 3,221 | 1,104 | (57 | ) | 1,047 | |||||||
| Equity minority interests | (28 | ) | 1 | (27 | ) | (86 | ) | 1 | (85 | ) | (39 | ) | – | (39 | ) | ||||
| Preference share dividends | – | – | – | (2 | ) | – | (2 | ) | – | – | – | ||||||||
| Earnings (Profit attributable to shareholders) | 961 | (187 | ) | 774 | 3,341 | (207 | ) | 3,134 | 1,065 | (57 | ) | 1,008 | |||||||
| Basic earnings per share | 16.8 | p | (3.3 | )p | 13.5 | p | 58.2 | p | (3.6 | )p | 54.6 | p | 18.7 | p | (1.0 | )p | 17.7 | p | |
| IFRS Consolidated income statement – statutory | |||||||||||||||||||
| 6 months 2004 | Q2 2004 | Q1 2004 | |||||||||||||||||
| UK GAAP | Adjustments | IFRS | UK GAAP | Adjustments | IFRS | UK GAAP | Adjustments | IFRS | |||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||
| Turnover | 10,007 | (181 | ) | 9,826 | 5,064 | (93 | ) | 4,971 | 4,943 | (88 | ) | 4,855 | |||||||
| Cost of sales | (2,055 | ) | (24 | ) | (2,079 | ) | (1,031 | ) | (13 | ) | (1,044 | ) | (1,024 | ) | (11 | ) | (1,035 | ) | |
| Selling, general and administrative expenditure | (3,367 | ) | 60 | (3,307 | ) | (1,641 | ) | 37 | (1,604 | ) | (1,726 | ) | 23 | (1,703 | ) | ||||
| Research and development expenditure | (1,311 | ) | (44 | ) | (1,355 | ) | (680 | ) | (16 | ) | (696 | ) | (631 | ) | (28 | ) | (659 | ) | |
| Operating costs | (6,733 | ) | (8 | ) | (6,741 | ) | (3,352 | ) | 8 | (3,344 | ) | (3,381 | ) | (16 | ) | (3,397 | ) | ||
| Trading profit | 3,274 | (189 | ) | 3,085 | 1,712 | (85 | ) | 1,627 | 1,562 | (104 | ) | 1,458 | |||||||
| Other operating income/(expense) | (67 | ) | – | (67 | ) | (102 | ) | – | (102 | ) | 35 | – | 35 | ||||||
| Operating profit | 3,207 | (189 | ) | 3,018 | 1,610 | (85 | ) | 1,525 | 1,597 | (104 | ) | 1,493 | |||||||
| Share of profits/(losses) of joint ventures and | |||||||||||||||||||
| associates | 50 | (20 | ) | 30 | 28 | (12 | ) | 16 | 22 | (8 | ) | 14 | |||||||
| Disposal of interests in associates | 41 | 4 | 45 | 41 | 4 | 45 | – | – | – | ||||||||||
| Profit before interest | 3,298 | (205 | ) | 3,093 | 1,679 | (93 | ) | 1,586 | 1,619 | (112 | ) | 1,507 | |||||||
| Finance costs, net | (91 | ) | 4 | (87 | ) | (48 | ) | 2 | (46 | ) | (43 | ) | 2 | (41 | ) | ||||
| Profit on ordinary activities before taxation | 3,207 | (201 | ) | 3,006 | 1,631 | (91 | ) | 1,540 | 1,576 | (110 | ) | 1,466 | |||||||
| Taxation | (882 | ) | 50 | (832 | ) | (449 | ) | 23 | (426 | ) | (433 | ) | 27 | (406 | ) | ||||
| Profit on ordinary activities after taxation | 2,325 | (151 | ) | 2,174 | 1,182 | (68 | ) | 1,114 | 1,143 | (83 | ) | 1,060 | |||||||
| Equity minority interests | (47 | ) | 1 | (46 | ) | (25 | ) | – | (25 | ) | (22 | ) | 1 | (21 | ) | ||||
| Preference share dividends | (2 | ) | – | (2 | ) | – | – | – | (2 | ) | – | (2 | ) | ||||||
| Earnings (Profit attributable to shareholders) | 2,276 | (150 | ) | 2,126 | 1,157 | (68 | ) | 1,089 | 1,119 | (82 | ) | 1,037 | |||||||
| Basic earnings per share | 39.5 | p | (2.6 | )p | 36.9 | p | 20.1 | p | (1.2 | )p | 18.9 | p | 19.4 | p | (1.4 | )p | 18.0 | p | |
| IFRS Consolidated balance sheet | 31st December 2004 | 31st December 2003 | |||||||||||
| UK GAAP | Adjustments | IFRS | UK GAAP | Adjustments | IFRS | ||||||||
| £m | £m | £m | £m | £m | £m | ||||||||
| Property, plant and equipment | 6,471 | (274 | ) | 6,197 | 6,441 | (285 | ) | 6,156 | |||||
| Goodwill | 139 | 26 | 165 | 143 | 12 | 155 | |||||||
| Other intangible assets | 2,003 | 510 | 2,513 | 1,697 | 533 | 2,230 | |||||||
| Investments in associates and joint ventures | 187 | 22 | 209 | 196 | 14 | 210 | |||||||
| Other investments | 298 | – | 298 | 262 | – | 262 | |||||||
| Deferred tax assets | 1,537 | 495 | 2,032 | 1,441 | 498 | 1,939 | |||||||
| Other non-current assets | 234 | 14 | 248 | 522 | 9 | 531 | |||||||
| Non-current assets | 10,869 | 793 | 11,662 | 10,702 | 781 | 11,483 | |||||||
| Current assets | |||||||||||||
| Inventories | 2,192 | 1 | 2,193 | 2,109 | – | 2,109 | |||||||
| Trade and other receivables | 5,538 | (724 | ) | 4,814 | 4,934 | (439 | ) | 4,495 | |||||
| Liquid investments | 2,818 | (1,306 | ) | 1,512 | 2,493 | (1,024 | ) | 1,469 | |||||
| Cash and cash equivalents | 1,161 | 1,306 | 2,467 | 962 | 1,024 | 1,986 | |||||||
| Assets held for sale | – | 2 | 2 | – | – | – | |||||||
| Current assets | 11,709 | (721 | ) | 10,998 | 10,498 | (439 | ) | 10,059 | |||||
| Total assets | 22,578 | 72 | 22,650 | 21,200 | 342 | 21,542 | |||||||
| Short-term borrowings | (1,582 | ) | – | (1,582 | ) | (1,452 | ) | – | (1,452 | ) | |||
| Trade and other payables | (5,542 | ) | 704 | (4,838 | ) | (5,561 | ) | 844 | (4,717 | ) | |||
| Current tax payable | (1,598 | ) | – | (1,598 | ) | (1,458 | ) | – | (1,458 | ) | |||
| Short-term provisions | – | (962 | ) | (962 | ) | – | (968 | ) | (968 | ) | |||
| Current liabilities | (8,722 | ) | (258 | ) | (8,980 | ) | (8,471 | ) | (124 | ) | (8,595 | ) | |
| Long-term borrowings | (4,381 | ) | – | (4,381 | ) | (3,651 | ) | – | (3,651 | ) | |||
| Deferred tax provision | (710 | ) | 333 | (377 | ) | (618 | ) | 449 | (169 | ) | |||
| Pensions and other post-employment benefits | (785 | ) | (1,734 | ) | (2,519 | ) | (807 | ) | (2,137 | ) | (2,944 | ) | |
| Other provisions | (1,534 | ) | 965 | (569 | ) | (1,617 | ) | 962 | (655 | ) | |||
| Other non-current liabilities | (244 | ) | – | (244 | ) | (232 | ) | – | (232 | ) | |||
| Non-current liabilities | (7,654 | ) | (436 | ) | (8,090 | ) | (6,925 | ) | (726 | ) | (7,651 | ) | |
| Total liabilities | (16,376 | ) | (694 | ) | (17,070 | ) | (15,396 | ) | (850 | ) | (16,246 | ) | |
| Net assets | 6,202 | (622 | ) | 5,580 | 5,804 | (508 | ) | 5,296 | |||||
| Equity | |||||||||||||
| Share capital | 1,484 | – | 1,484 | 1,487 | – | 1,487 | |||||||
| Share premium account | 304 | – | 304 | 264 | – | 264 | |||||||
| Shares held by ESOP Trusts | (2,574 | ) | 38 | (2,536 | ) | (2,729 | ) | 11 | (2,718 | ) | |||
| Other reserves | 1,930 | – | 1,930 | 1,925 | – | 1,925 | |||||||
| Retained earnings | 4,781 | (655 | ) | 4,126 | 4,112 | (514 | ) | 3,598 | |||||
| Equity shareholders’ funds | 5,925 | (617 | ) | 5,308 | 5,059 | (503 | ) | 4,556 | |||||
| Non-equity minority interests | – | – | – | 503 | – | 503 | |||||||
| Equity minority interests | 277 | (5 | ) | 272 | 242 | (5 | ) | 237 | |||||
| Capital employed | 6,202 | (622 | ) | 5,580 | 5,804 | (508 | ) | 5,296 | |||||
| IFRS Consolidated statement of recognised income and expense | 31st December 2004 | 31st December 2003 | |||||||||||
| UK GAAP | Adjustments | IFRS | UK GAAP | Adjustments | IFRS | ||||||||
| £m | £m | £m | £m | £m | £m | ||||||||
| Exchange movements | (54 | ) | 24 | (30 | ) | 113 | 14 | 127 | |||||
| Tax on exchange movements and unrealised gains | (73 | ) | – | (73 | ) | (92 | ) | 2 | (90 | ) | |||
| Loss from own shares for employee share schemes | (55 | ) | – | (55 | ) | (39 | ) | – | (39 | ) | |||
| Goodwill written back | 20 | (20 | ) | – | – | – | – | ||||||
| Revaluation of goodwill due to exchange | 6 | – | 6 | (7 | ) | – | (7 | ) | |||||
| Unrealised loss on disposal of intellectual property | (1 | ) | 1 | – | 7 | (7 | ) | – | |||||
| Actuarial gains/(losses) on defined benefit plans | – | 91 | 91 | – | (311 | ) | (311 | ) | |||||
| Net gains/(losses) recognised directly in equity | (157 | ) | 96 | (61 | ) | (18 | ) | (302 | ) | (320 | ) | ||
| Profit attributable to shareholders | 4,302 | (394 | ) | 3,908 | 4,478 | (277 | ) | 4,201 | |||||
| Total recognised income and expense for the year | 4,145 | (298 | ) | 3,847 | 4,460 | (579 | ) | 3,881 | |||||
| IFRS Consolidated cash flow statement | |||||||||||||
| 12 months 2004 | 12 months 2003 | Q4 2004 | Q3 2004 | Q2 2004 | Q1 2004 | ||||||||
| £m | £m | £m | £m | £m | £m | ||||||||
| Cash flows from operating activities | |||||||||||||
| Cash generated from operations | 6,527 | 7,005 | 1,406 | 2,006 | 1,783 | 1,332 | |||||||
| Taxation paid | (1,583 | ) | (1,917 | ) | (467 | ) | (391 | ) | (454 | ) | (271 | ) | |
| Net cash inflow from operating activities | 4,944 | 5,088 | 939 | 1,615 | 1,329 | 1,061 | |||||||
| Cash flow from investing activities | |||||||||||||
| Purchase of tangible fixed assets | (788 | ) | (746 | ) | (283 | ) | (195 | ) | (189 | ) | (121 | ) | |
| Proceeds from sale of tangible fixed assets | 53 | 46 | 15 | 24 | 12 | 2 | |||||||
| Purchase of intangible assets | (255 | ) | (316 | ) | (86 | ) | (96 | ) | (48 | ) | (25 | ) | |
| Purchase of equity investments | (103 | ) | (63 | ) | (26 | ) | (6 | ) | (67 | ) | (4 | ) | |
| Proceeds from sale of equity investments | 58 | 125 | 3 | 18 | 34 | 3 | |||||||
| Purchase of businesses, net of cash acquired | (297 | ) | (12 | ) | 9 | (306 | ) | – | – | ||||
| Disposal of businesses and interest in associates | 230 | 3 | 174 | – | 56 | – | |||||||
| Investment in joint ventures and associates | (2 | ) | (3 | ) | – | – | (2 | ) | – | ||||
| Interest received | 317 | 195 | 89 | 79 | 89 | 60 | |||||||
| Dividends from joint ventures and associates | 11 | 1 | 3 | 4 | 2 | 2 | |||||||
| Net cash outflow from investing activities | (776 | ) | (770 | ) | (102 | ) | (478 | ) | (113 | ) | (83 | ) | |
| Cash flow from financing activities | |||||||||||||
| (Increase)/decrease in liquid investments | (53 | ) | (373 | ) | (19 | ) | (37 | ) | 10 | (7 | ) | ||
| Proceeds from own shares for employee share options | 23 | 26 | 7 | 4 | 8 | 4 | |||||||
| Issue of share capital | 42 | 41 | 17 | 9 | 6 | 10 | |||||||
| Share capital purchased for cancellation | (201 | ) | (980 | ) | – | – | (23 | ) | (178 | ) | |||
| Purchase of Treasury shares | (799 | ) | – | (267 | ) | (247 | ) | (195 | ) | (90 | ) | ||
| Redemption of preference shares issued by subsidiary | (489 | ) | – | – | – | (49 | ) | (440 | ) | ||||
| Increase in long-term loans | 1,365 | 1,046 | – | – | 1,365 | – | |||||||
| Repayment of long-term loans | (15 | ) | (23 | ) | (4 | ) | (7 | ) | – | (4 | ) | ||
| Net repayment of short-term loans | (407 | ) | (442 | ) | 19 | 59 | (475 | ) | (10 | ) | |||
| Net repayment of obligations under finance leases | (22 | ) | – | (22 | ) | – | – | – | |||||
| Interest paid | (494 | ) | (327 | ) | (135 | ) | (133 | ) | (130 | ) | (96 | ) | |
| Dividends paid to GSK shareholders | (2,475 | ) | (2,333 | ) | (56 | ) | (1,092 | ) | (807 | ) | (520 | ) | |
| Dividends paid to minority interests | (73 | ) | (84 | ) | (9 | ) | (4 | ) | (9 | ) | (51 | ) | |
| Dividends paid on preference shares | (2 | ) | (15 | ) | – | – | – | (2 | ) | ||||
| Other financing cash flows | 49 | 82 | 19 | 55 | (58 | ) | 33 | ||||||
| Net cash outflow from financing activities | (3,551 | ) | (3,382 | ) | (450 | ) | (1,393 | ) | (357 | ) | (1,351 | ) | |
| Exchange adjustments | (93 | ) | (110 | ) | (77 | ) | 3 | 28 | (47 | ) | |||
| Increase/(decrease) in cash and cash equivalents | 524 | 826 | 310 | (253 | ) | 887 | (420 | ) | |||||
| Cash and cash equivalents at beginning of period | 1,831 | 1,005 | 2,045 | 2,298 | 1,411 | 1,831 | |||||||
| Cash and cash equivalents at end of period | 2,355 | 1,831 | 2,355 | 2,045 | 2,298 | 1,411 | |||||||
| Cash and cash equivalents at end of period comprise: | |||||||||||||
| Cash and cash equivalents | 2,467 | 1,986 | 2,467 | 2,244 | 2,529 | 1,526 | |||||||
| Overdrafts | (112 | ) | (155 | ) | (112 | ) | (199 | ) | (231 | ) | (115 | ) | |
| 2,355 | 1,831 | 2,355 | 2,045 | 2,298 | 1,411 | ||||||||
Shareholder return
| Share price | |||||||||||||
| 2004 | 2003 | 2002 | |||||||||||
| (£) | (£) | (£) | 2007 | 2006 | 2005 | ||||||||
| £m | £m | £m | |||||||||||
| At 1st January | 12.80 | 11.92 | 17.23 | 13.44 | 14.69 | 12.22 | |||||||
| High during the year | 12.99 | 13.90 | 17.80 | 14.93 | 15.77 | 15.44 | |||||||
| Low during the year | 10.42 | 10.00 | 10.57 | 11.60 | 13.26 | 11.75 | |||||||
| At 31st December | 12.22 | 12.80 | 11.92 | 12.79 | 13.44 | 14.69 | |||||||
| (Decrease)/Increase | (5 | )% | 7 | % | (31 | )% | |||||||
| (Decrease)/increase | (5)% | (9)% | 20% | ||||||||||
The table above sets out the middle market closing prices derived from the London Stock Exchange Daily Official List. The company’s share price decreased by five per cent5% in 20042007 from a price of £12.80£13.44 at 1st January 20042007 to £12.22£12.79 at 31st December 2004.2007. This compares with an increase in the FTSE 100 index of eight per cent4% during the year. The share price on 22nd February 2008 was £11.10.
Market capitalisation
The market capitalisation, based on shares in issue excluding Treasury shares, of GlaxoSmithKline at 31st December 20042007 was £72£70 billion. At that date GlaxoSmithKlineGSK was the fourthfifth largest company by market capitalisation on the FTSE index.
SmithKline Beecham plc Floating Rate Unsecured
Loan Stock 1990/2010
The loan stock is not listed on any exchange but holders may require SmithKline Beecham plc to redeem their loan stock at par, i.e. £1 for every £1 of loan stock held, on the first business day of March, June, September and December. Holders wishing to redeem all or part of their loan stock should complete the notice on the back of their loan stock certificate and return it to the registrar, to arrive at least 30 days before the relevant redemption date.
Taxation
General information concerning the UK and US tax effects of share ownership is set out in 'Taxation‘Taxation information for shareholders'shareholders’ on page 178.173.
Dividends
GlaxoSmithKline pays dividends quarterly. The BoardIt continues to increase cash returns to shareholders through its dividend policy. Dividends remain an essential component of total shareholder return and GSK is committed to increasing its dividend over the long-term. Details of the dividends declared, dividends for 2004 as follows:the amount and the payment dates are given in Note 16 to the financial statements, ‘Dividends’.
| 2004 | 2003 | ||||
| Dividends per share | pence | pence | |||
| First interim – paid 1st July 2004 | 10 | 9 | |||
| Second interim – paid 30th September 2004 | 10 | 9 | |||
| Third interim – paid 6th January 2005 | 10 | 9 | |||
| Fourth interim – payable 7th April 2005 | 12 | 14 | |||
| Total | 42 | 41 | |||
Dividends per shareAs a guide to shareholders, theThe table below sets out the dividends per share paid in the last five years.
| Year | GSK (p) | GW (p) | SB (p) | ||||
| 2004 | 42.0 | ||||||
| 2003 | 41.0 | ||||||
| 2002 | 40.0 | ||||||
| 2001 | 39.0 | ||||||
| 2000 | 38.0 | 29.66 | |||||
Dividends paid to Glaxo Wellcome and SmithKline Beecham shareholders are expressed as dividends per GlaxoSmithKline share.
| Year | pence | |
| 2007 | 53 | |
| 2006 | 48 | |
| 2005 | 44 | |
| 2004 | 42 | |
| 2003 | 41 | |
Dividends per ADSAs a guide to holders of ADRs, theThe table below sets out the dividends per ADS paid in US dollars in the last five years. They areyears, translated into US dollars at applicable exchange rates.
| Year | GSK ($) | GW ($) | SB ($) | US$ | |||||
| 2007 | 2.14 | ||||||||
| 2006 | 1.80 | ||||||||
| 2005 | 1.57 | ||||||||
| 2004 | 1.53 | 1.53 | |||||||
| 2003 | 1.39 | 1.39 | |||||||
| 2002 | 1.24 | ||||||||
| 2001 | 1.11 | ||||||||
| 2000 | 1.10 | 0.87 | |||||||
| Dividend calendar | |
| Fourth quarter 2007 | |
| Ex-dividend date | 13th February 2008 |
| Record date | 15th February 2008 |
| Payable | 10th April 2008 |
| First quarter 2008 | |
| Ex-dividend date | 30th April 2008 |
| Record date | 2nd May 2008 |
| Payable | 10th July 2008 |
| Second quarter 2008 | |
| Ex-dividend date | 30th July 2008 |
| Record date | 1st August 2008 |
| Payable | 9th October 2008 |
| Third quarter 2008 | |
| Ex-dividend date | 29th October 2008 |
| Record date | 31st October 2008 |
| Payable | 8th January 2009 |
Dividends paidInternet
Information about the company including details of the share price is available on GSK’s website at www.gsk.com.
Information made available on the website does not constitute part of this Annual Report.
Investor relations
Investor Relations may be contacted as follows:
UK
980 Great West Road, Brentford, Middlesex TW8 9GS
Tel: +44 (0)20 8047 5000
USA
One Franklin Plaza, PO Box 7929, Philadelphia PA 19101
Tel: 1 888 825 5249 (US toll free)
Tel: +1 215 751 4000 (outside US)
| GSK Annual Report 2007 | 169 |
| Shareholder information | ||
Shareholder information | ||
continued | ||
Shareholder information
Ordinary sharesAnalysis of shareholdings at 31st December 2007
| Number of | % of total | % of total | Number of | ||
| accounts | accounts | shares | shares | ||
| Holding of shares | |||||
| Up to 1,000 | 126,330 | 71 | 1 | 45,130,222 | |
| 1,001 to 5,000 | 39,861 | 23 | 1 | 85,399,100 | |
| 5,001 to 100,000 | 9,480 | 5 | 2 | 136,988,653 | |
| 100,001 to 1,000,000 | 970 | 1 | 6 | 334,350,551 | |
| Over 1,000,000 | 457 | – | 90 | 5,410,718,500 | |
| 177,098 | 100 | 100 | 6,012,587,026 | ||
| Held by | |||||
| Nominee companies | 30,647 | 17 | 73 | 4,355,052,360 | |
| Investment and trust companies | 44 | – | 1 | 32,448,597 | |
| Insurance companies | 13 | – | – | 109,152 | |
| Individuals and other corporate bodies | 146,391 | 83 | 4 | 266,773,798 | |
| BNY (Nominees) Limited | 2 | – | 14 | 854,008,961 | |
| Held as Treasury shares by GlaxoSmithKline | 1 | – | 8 | 504,194,158 | |
| 177,098 | 100 | 100 | 6,012,587,026 | ||
The company's shares are listed on the London Stock Exchange.
RegistrarThe company's share register is administered by Lloyds TSB Registrars, who also provide the following services:
American Depositary Shares
The company's shares are listed on the New York Stock Exchange in the form of American Depositary Shares (ADSs) and these are evidenced by American Depositary Receipts (ADRs), each one of which represents two ordinary shares.
ADR programme administratorThe ADR programme is administered by The Bank of New York and provides the Global BuyDIRECT service which is a direct ADS purchase/sale and dividend reinvestment plan for ADR holders.
Share dealing facilityHoare Govett Limited operates a postal share dealing service in the company’s ordinary shares. It enables investors to buy or sell shares at competitive commission charges. Transactions are executed and settled by Pershing Securities Limited. Further details of this service together with purchase and sale forms may be obtained by telephoning +44 (0)20 7661 6555.
Smith Barney, part of Citigroup, also offers a share dealing service in the company’s ordinary shares and ADSs. Further details of this service can be obtained by contacting them, see contact details inside back cover.
The provision of the details above are not intended to be an invitation or inducement to engage in an investment activity. Advice on share dealing, should be obtained from a stockbroker or independent financial adviser.
Share price informationShare price information is available on the company's website at www.gsk.com. Information in the UK is also available on Ceefax, Teletext, and from FT Cityline by calling 0906 003 5694 or 0906 843 5694 (calls charged at 60p a minute plus VAT at all times).
Annual General Meeting 2005
The Annual General Meeting is the company's principal forum for communication with private shareholders. In addition to the formal resolutions to be put to the meeting, there will be a presentation by the Chief Executive Officer on the performance of the business and its future development. There will be opportunity for questions to the Board, and the Chairmen of the Board's committees will take questions on matters relating to those committees.
Investors holding shares in the company through a nominee service should arrange with that nominee service to be appointed as a corporate representative or proxy in respect of their shareholding in order to attend and vote at the meeting.
ADR holders wishing to attend the meeting must obtain a proxy from The Bank of New York which will enable them to attend the meeting and vote on the business to be transacted. ADR holders may instruct The Bank of New York as to the way in which the shares represented by their ADRs should be voted by completing and returning the voting card provided by the bank in accordance with the instructions given.
Results AnnouncementsThe Results Announcements are issued to the London Stock Exchange, and are available on their news service. At the same time, or shortly afterwards, they are issued to the media, made available on the website and sent to the US Securities and Exchange Commission and the New York Stock Exchange.
Financial reportsThe company publishes an Annual Report and, for the investor not needing the full detail of the Report, an Annual Review. These are available from the date of publication on the website.
The Annual Review is sent to all shareholders on the date of publication. Shareholders may also elect to receive the Report by writing to the company’s registrars. Alternatively shareholders may elect to receive notification by email of the publication of financial reports by registering on www.shareview.co.uk.
Copies of previous financial reports are available on the website. Printed copies can be obtained from the registrar in the UK and from the Customer Response Center in the USA.
Share capital
Nature of trading market
The Ordinary Shares of the company were listed on the London Stock Exchange on 27th December 2000. The shares were also listed on the New York Stock Exchange (in the form of American Depositary Shares‘ADSs’) from the same date.
The following table sets out, for the periods indicated, the high and low middle market closing quotations in pence for the shares on the London Stock Exchange, as derived from its Daily Official List, and the high and low last reported sales prices in US dollars for the ADSs on the New York Stock Exchange, as derived from the New York Stock Exchange Composite Tape.
Information relating to the share and ADS prices for Glaxo Wellcome and SmithKline Beecham prior to the date of the merger is also given.
| GlaxoSmithKline | Pence per share | |||
| Fiscal periods from 27th December 2000 | High | Low | ||
| Quarter ended 31st March 2005* | 1295 | 1175 | ||
| February 2005 | 1295 | 1178 | ||
| January 2005 | 1250 | 1175 | ||
| December 2004 | 1222 | 1114 | ||
| November 2004 | 1209 | 1101 | ||
| October 2004 | 1215 | 1121 | ||
| September 2004 | 1209 | 1137 | ||
| Quarter ended 31st December 2004 | 1222 | 1101 | ||
| Quarter ended 30th September 2004 | 1209 | 1042 | ||
| Quarter ended 30th June 2004 | 1201 | 1067 | ||
| Quarter ended 31st March 2004 | 1299 | 1060 | ||
| Quarter ended 31st December 2003 | 1390 | 1250 | ||
| Quarter ended 30th September 2003 | 1306 | 1158 | ||
| Quarter ended 30th June 2003 | 1335 | 1131 | ||
| Quarter ended 31st March 2003 | 1242 | 1000 | ||
| Year ended 31st December 2002 | 1780 | 1057 | ||
| Year ended 31st December 2001 | 2032 | 1626 | ||
| 27th to 31st December 2000 | 1920 | 1890 | ||
| US dollars per ADS | ||||
| Fiscal periods from 27th December 2000 | High | Low | ||
| Quarter ended 31st March 2005* | 49.45 | 44.17 | ||
| February 2005 | 49.45 | 44.36 | ||
| January 2005 | 47.35 | 44.48 | ||
| December 2004 | 47.50 | 43.25 | ||
| November 2004 | 45.04 | 42.54 | ||
| October 2004 | 44.01 | 41.15 | ||
| September 2004 | 43.84 | 40.68 | ||
| Quarter ended 31st December 2004 | 47.50 | 41.15 | ||
| Quarter ended 30th September 2004 | 43.84 | 39.04 | ||
| Quarter ended 30th June 2004 | 43.50 | 39.44 | ||
| Quarter ended 31st March 2004 | 46.93 | 39.38 | ||
| Quarter ended 31st December 2003 | 47.64 | 42.09 | ||
| Quarter ended 30th September 2003 | 43.22 | 36.91 | ||
| Quarter ended 30th June 2003 | 43.87 | 35.40 | ||
| Quarter ended 31st March 2003 | 40.13 | 31.85 | ||
| Year ended 31st December 2002 | 50.87 | 32.86 | ||
| Year ended 31st December 2001 | 58.00 | 47.15 | ||
| 27th to 31st December 2000 | 5613/16 | 553/8 | ||
| * to 25th February 2005 | ||||
Glaxo Wellcome
Fiscal periodfrom 1st January to 26th December 2000
| Pence per share | ||||
| High | Low | |||
| 2000 | 2110 | 1440 | ||
Fiscal periodfrom 1st January to 26th December 2000
| US dollars per ADS | ||||
| High | Low | |||
| 2000 | 63 3 /4 | 46 | ||
SmithKline Beecham
Fiscal periodfrom 1st January to 26th December 2000
| Pence per share | ||||
| High | Low | |||
| 2000 | 955 | 671 | ||
Fiscal periodfrom 1st January to 26th December 2000
| Analysis of shareholdings | ||||||||
| Analysis of shareholdings at 31st December 2004: | Number of accounts | % of total accounts | % of total shares | Number of shares | ||||
| Holding of shares | ||||||||
| Up to 1,000 | 153,285 | 70 | 1 | 55,899,970 | ||||
| 1,001 to 5,000 | 49,861 | 23 | 2 | 107,541,323 | ||||
| 5,001 to 100,000 | 13,634 | 6 | 3 | 206,901,953 | ||||
| 100,001 to 1,000,000 | 1,226 | 1 | 7 | 402,558,721 | ||||
| Over 1,000,000 | 513 | – | 87 | 5,164,786,864 | ||||
| Totals | 218,519 | 100 | 100 | 5,937,688,831 | ||||
| Held by | ||||||||
| Nominee companies | 40,211 | 18 | 79 | 4,662,105,341 | ||||
| Investment and trust companies | 71 | – | 1 | 31,564,510 | ||||
| Insurance companies | 26 | – | – | 25,620,938 | ||||
| Individuals and other corporate bodies | 178,209 | 82 | 6 | 369,095,973 | ||||
| BNY (Nominees) Limited | 1 | – | 13 | 779,354,069 | ||||
| Held as Treasury Shares by GlaxoSmithKline | 1 | – | 1 | 69,948,000 | ||||
| Totals | 218,519 | 100 | 100 | 5,937,688,831 | ||||
The Bank of New York’sMellon’s holding held through BNY (Nominees) Limited represents the company’s ADR programme, whereby each ADS represents two Ordinary Sharesshares of 25p nominal value. At 22nd February 2008, BNY (Nominees) Limited held 854,735,903 Ordinary shares representing 15.59% of the issued share capital at that date.
At 25th22nd February 2005,2008, the number of holders of record of shares in the USA was 1,1871,108 with holdings of 1,776,3341,393,956 shares, and the number of registered holders of the ADRs was 44,53737,026 with holdings of 401,140,809427,367,951 ADRs. Certain of these shares and ADRs were held by brokers or other nominees, asnominees. As a result the number of holders of record or registered holders in the USA is not representative of the number of beneficial holders or of the residence of beneficial holders.
ControlDocuments on display
The Memorandum and Articles of company
As far as is known toAssociation of the company it is not directly or indirectly owned or controlled by one or more corporations or by any government. The company does not know of any arrangements,and other documents referred to in this Annual Report are available for inspection at the operation of which might result in a change in controlRegistered Office of the company.
Substantial shareholdingsPublications
At 25th February 2005,In late March 2008 GSK will publish on the company had received notification of the following interests of three per cent or morewebsite its Corporate Responsibility Report covering performance in the shares in issue, excluding Treasury shares:
As far as is knownareas including community investment, ethics and integrity, access to the company, no other person was the owner of three per cent or more of the shares in issue, excluding Treasury shares of the company.medicines, R&D and environment health and safety.
Directors and Officers
The interests of the Directors and Officers of the company, as defined in the Companies Act 1985, in share options of the company are given in the Remuneration Report (pages 43 to 58).
Exchange controls and other limitations affecting security holders
There are currently no UK laws, decrees or regulations restricting the import or export of capital or affecting the remittance of dividends or other payments to holders of the company’s shares who are non-residents of the UK. There are no limitations relating only to non-residents of the UK under English law or the company’s Memorandum and Articles of Association on the right to be a holder of, and to vote in respect of, the company’s shares.
| 170 | GSK Annual Report 2007 |
| INVESTORINFORMATION | |
| Shareholder Information | |
| Shareholder information | |
| continued | |
Documents on displayNature of trading market
The Memorandum and Articles of AssociationOrdinary shares of the company were listed on the London Stock Exchange on 27th December 2000. The shares were also listed on the New York Stock Exchange (NYSE) (in the form of American Depositary Shares ‘ADSs’) from the same date.
The following tables set out, for the periods indicated, the high and other documents referredlow middle market closing quotations in pence for the shares on the London Stock Exchange, and the high and low last reported sales prices in US dollars for the ADSs on the NYSE.
| GlaxoSmithKline | ||||
| Pence per share | ||||
| High | Low | |||
| Quarter ended 31st March 2008* | 1385 | 1070 | ||
| February 2008* | 1184 | 1070 | ||
| January 2008 | 1385 | 1174 | ||
| December 2007 | 1323 | 1272 | ||
| November 2007 | 1288 | 1160 | ||
| October 2007 | 1333 | 1232 | ||
| September 2007 | 1341 | 1297 | ||
| Quarter ended 31st December 2007 | 1333 | 1160 | ||
| Quarter ended 30th September 2007 | 1341 | 1215 | ||
| Quarter ended 30th June 2007 | 1488 | 1272 | ||
| Quarter ended 31st March 2007 | 1493 | 1344 | ||
| Quarter ended 31st December 2006 | 1511 | 1326 | ||
| Quarter ended 30th September 2006 | 1540 | 1418 | ||
| Quarter ended 30th June 2006 | 1557 | 1455 | ||
| Quarter ended 31st March 2006 | 1577 | 1424 | ||
| Year ended 31st December 2005 | 1544 | 1175 | ||
| Year ended 31st December 2004 | 1299 | 1042 | ||
| Year ended 31st December 2003 | 1390 | 1000 | ||
| US dollars per ADS | ||||
| High | Low | |||
| Quarter ended 31st March 2008* | 54.36 | 42.16 | ||
| February 2008* | 47.01 | 42.16 | ||
| January 2008 | 54.36 | 46.77 | ||
| December 2007 | 53.93 | 50.39 | ||
| November 2007 | 52.68 | 47.87 | ||
| October 2007 | 54.14 | 50.52 | ||
| September 2007 | 54.23 | 52.22 | ||
| Quarter ended 31st December 2007 | 54.14 | 47.87 | ||
| Quarter ended 30th September 2007 | 54.23 | 49.43 | ||
| Quarter ended 30th June 2007 | 59.35 | 51.28 | ||
| Quarter ended 31st March 2007 | 58.37 | 52.66 | ||
| Quarter ended 31st December 2006 | 56.20 | 51.41 | ||
| Quarter ended 30th September 2006 | 57.01 | 53.23 | ||
| Quarter ended 30th June 2006 | 58.38 | 51.48 | ||
| Quarter ended 31st March 2006 | 54.94 | 50.15 | ||
| Year ended 31st December 2005 | 53.53 | 44.48 | ||
| Year ended 31st December 2004 | 47.50 | 39.04 | ||
| Year ended 31st December 2003 | 47.40 | 32.75 | ||
| * | to 22nd February 2008 |
| Annual General Meeting 2008 | |
| The Queen Elizabeth II Conference Centre, 21st May 2008 | |
| Broad Sanctuary, Westminster, | |
| London SW1P 3EE | |
The Annual General Meeting is the company’s principal forum for communication with private shareholders. In addition to the formal business there will be a presentation by the Chief Executive Officer on the performance of the Group and its future development. There will be opportunity for questions to the Board, and the Chairmen of the Board’s committees will take questions on matters relating to those committees.
Investors holding shares in this Annual Reportthe company through a nominee service should arrange with that nominee service to be appointed as a corporate representative or proxy in respect of their shareholding in order to attend and vote at the meeting.
ADR holders wishing to attend the meeting must obtain a proxy from The Bank of New York Mellon which will enable them to attend and vote on the business to be transacted. ADR holders may instruct The Bank of New York Mellon as to the way in which the shares represented by their ADRs should be voted by completing and returning the voting card provided by the bank in accordance with the instructions given.
Financial reporting
| Financial reporting calendar 2008 | ||
| Announcement of 1st Quarter Results | April 2008 | |
| Announcement of 2nd Quarter Results | July 2008 | |
| Announcement of 3rd Quarter Results | October 2008 | |
| Preliminary Announcement of Annual Results | February 2009 | |
| Publication of Annual Report/Review | February/March 2009 | |
Results announcements
Results announcements are issued to the London Stock Exchange and are available for inspection aton its news service. Shortly afterwards, they are issued to the Registered Office of the company.
Publications
This year GlaxoSmithKline is again producing a Corporate Responsibility Report covering performance in areas including community investment, business ethics and integrity, access to medicines, R&D and environmental health and safety. The report will be publishedmedia, are made available on the website atand sent to the endUS Securities and Exchange Commission and the NYSE.
Financial reports
The company publishes an Annual Report and, for the investor not needing the full detail of March.the Report, an Annual Review. These are available from the date of publication on the website.
The Annual Review is sent to all shareholders. Shareholders may also elect to receive the Annual Report by writing to the company’s registrars. Alternatively shareholders may elect to receive notification by email of the publication of financial reports by registering on www.shareview.co.uk.
Copies of previous financial reports are available on GSK’s website. Printed copies can be obtained from the registrars in the UK and from the GSK Response Center in the USA.
Queries relating to receipt of duplicate copies of GSK’s publications should be addressed to the registrars.
| GSK Annual Report 2007 | 171 |
| INVESTORINFORMATION | |
| Shareholder Information | |
| Shareholder information | |
| continued | |
Ordinary shares
The company’s shares are listed on the London Stock Exchange.
Registrar
The company’s registrars are:
Equiniti
Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA www.shareview.co.uk Tel: 0871 384 2991 inside the UK
Tel: +44 (0)121 415 7067 outside the UK
| Equiniti also provide the following services: | |
| • | GlaxoSmithKline Investment Plan |
| • | GlaxoSmithKline Individual Savings Account |
| • | GlaxoSmithKline Corporate Sponsored Nominee |
| • | Shareview service |
| • | Shareview dealing service |
| • | Dividend reinvestment plan |
Shareview dealing service
Shareholders may buy or sell shares by internet or telephone through Shareview dealing, a share dealing service provided by Equiniti. For internet purchases and sales log on to www.shareview.co.uk/dealing and for telephone purchases and sales call 0871 384 2020 (inside the UK only) between 8.00am and 4.30pm, Monday to Friday.
Glaxo Wellcome and SmithKline Beecham corporate PEPs
The Share Centre Limited
Oxford House, Oxford Road, Aylesbury, Bucks HP21 8SZ
Tel: +44 (0)1296 414141
The provision of the details above is not intended to be an invitation or inducement to engage in an investment activity. Advice on share dealing should be obtained from a stockbroker or independent financial adviser.
American Depositary Shares
The company’s shares are listed on the NYSE in the form of American Depositary Shares and these are evidenced by American Depositary Receipts (ADRs), each one of which represents two Ordinary shares.
In general, the NYSE’s rules permit the company to follow UK corporate governance practices instead of those that apply in the USA, provided that the company explains any significant variations. This explanation is provided on the company’s website.
ADR programme administrator
The ADR programme is administered by:
The Bank of New York Mellon
Shareholder Relations
PO Box 11258, Church Street Station
New York NY 10286-1258
www.adrbny.com
Tel: 1 877 353 1154 (US toll free)
Tel: +1 212 815 3700 (outside US)
The administrators also provide Global BuyDIRECT, a direct ADS purchase/sale and dividend reinvestment plan for ADR holders.
GSK Response Center
Tel: 1 888 825 5249 (US toll free)
| 172 | GSK Annual Report 2007 |
| Taxation information for shareholders | |
Taxation information for shareholders
Information for shareholders
A summary of the main tax consequences for holders of shares and ADRs who are citizens or residents of the UK or the USA is set out below. It is not a complete analysis of all the possible tax consequences of purchase or ownership of these securities. It is intended only as a general guide. Holders are advised to consult their advisers with respect to the tax consequences of the purchase and ownership of their shares or ADRs, and the consequences under state and local tax laws in the USA and the implications of the new UK/US Income Tax convention.
| A summary of the main tax consequences for holders of shares and ADRs who are citizens or residents of the UK or the USA is set out below. It is not a complete analysis of all the possible tax consequences of purchase or ownership of these securities. It is intended only as a general guide. Holders are advised to consult their advisers with respect to the tax consequences of the purchase and ownership of their shares or ADRs, and the consequences under state and local tax laws in the USA and the implications of the current UK/US Income Tax convention. | |
This statement is based upon UK and US tax laws and practices at the date of this report.
The new UK/US Income Tax Convention came into force on 31st March 2003. The provisions of the new treaty apply for UK tax purposes from 1st April 2003 (UK Corporation Tax), 6th April 2003 (UK Income Tax and Capital Gains Tax) and 1st May 2003 (Withholding Taxes). For US tax purposes, the provisions of the new treaty apply from 1st May 2003 (Withholding Taxes) and 1st January 2004 (all other US taxes). However, holders of shares or ADRs have the ability to elect to continue to use the provisions of the previous treaty for 12 months following the new treaty’s entry into force. An election must be made in advance of the first event to which the new treaty would apply.
US holders of ADRs generally will be treated as the owners of the underlying shares for the purposes of the current USA/US/UK double taxation conventions relating to income and gains (Income Tax Convention), estate and gift taxes (Estate and Gift Tax Convention) and for the purposes of the US Internal Revenue Code of 1986, as amended (the Code).
The following analysis deals with dividends paid after 6th April 1999 when Advance Corporation Tax (ACT) was abolished.
UK shareholders
Taxation of dividends
From 6th April 1999, the rate of tax credits was reduced to one ninth. As a result of compensating reductions in the rate of tax on dividend income, there is no increase in the tax borne by UK resident individual shareholders. Tax credits are, however, no longer repayable to shareholders with a tax liability of less than the associated tax credit.
Taxation of capital gains
UK shareholders may be liable for UK tax on gains on the disposal of shares or ADRs. TheyFor disposals made prior to 6th April 2008, they may also be entitled to indexation relief and taper relief on such sales. Indexation relief is calculated on the market value of shares at 31st March 1982 and on the cost of any subsequent purchases from the date of such purchase. Indexation relief for individual shareholders ceased on 5th April 1998. Taper relief is available to individual shareholders who hold or are deemed to hold shares for at least three years before they are sold. A capital gain is taxed at the marginal tax rate of the individual. For disposals after 5th April 2008 it is proposed that no indexation or taper relief will be available and that a capital gain will be taxed at a flat rate of 18% rather than the marginal tax rate of the individual. These proposals are not yet law and may be subject to change.
Inheritance tax
Individual shareholders may be liable to inheritance tax on the transfer of shares or ADRs. Tax may be charged on the amount by which the value of the shareholder'sshareholder’s estate is reduced as a result of any transfer by way of gift or other disposal at less than full market value.
Such a gift or other disposal is subject to both UK inheritance tax and US estate or gift tax. The Estate and Gift Tax Convention would generally provide for tax paid in the USA to be credited against tax payable in the UK.
Stamp duty
UK stamp duty or stamp duty reserve tax (SDRT) will, subject to certain exemptions, be payable on the purchase of shares at a rate of 0.5 per cent0.5% of the purchase price. There is a minimum charge of £5 where a stamp duty liability arises.
US shareholders
The following is a summary of certain UK taxation and USA federal income tax considerations that may be relevant to a US holder of shares or ADRs. This summary only applies to a shareholder that holds shares or ADRs as capital assets, is a citizen or resident of the USA or a domestic corporation or that is otherwise subject to United States federal income taxation on a net income basis in respect of the shares or ADRs, and is not resident in the UK for UK tax purposes and does not hold shares for the purposes of a trade, profession or vocation that is carried on in the UK through a branch or agency.
Taxation of dividends
The gross amount of dividends received (including amounts in respect of associated tax credit and(without reduction for any UK withholding tax) is treated as foreign source dividend income for US tax purposes. It is not eligible for the dividend received deduction allowed to US corporations. Dividends on ADRs are payable in US dollars; dividends on shares are payable in Sterling. Dividends paid in pounds Sterling will be included in income in the US dollar amount calculated by reference to the exchange rate on the day the dividends are received by the holder. Subject to certain exceptions for short-term or hedged positions, an individual eligible US holder will be subject to US taxation at a maximum rate of 15 per cent15% in respect of qualified dividends received before 2009.2011. Shareholders are advised to consult their own Tax Advisers to confirm their eligibility.
Taxation of capital gains
Generally, US holders will not be subject to UK capital gains tax, but will be subject to US tax on capital gains realised on the sale or other disposal of shares or ADRs.
Estate and gift taxes
Under the Estate and Gift Tax Convention, a US shareholder is not generally subject to UK inheritance tax.
Stamp duty
UK stamp duty or SDRT will, subject to certain exemptions, be payable on any issue or transfer of shares to the ADR custodian or depository at a rate of 1.5 per cent1.5% of their price (if issued), the amount of any consideration provided (if transferred on sale), or their value (if transferred for no consideration).
No SDRT would be payable on the transfer of an ADR. No UK stamp duty should be payable on the transfer of an ADR provided that the instrument of transfer is executed and remains at all times outside the UK. Any stamp duty on the transfer of an ADR would be payable at a rate of 0.5 per cent0.5% of the consideration for the transfer. Any sale of the underlying shares would result in liability to UK stamp duty or, as the case may be, SDRT at a rate of 0.5 per cent.0.5% . There is a minimum charge of £5 where a stamp duty liability arises.
| GSK Annual Report 2007 | 173 |
Cross reference to Form 20-F
Glossary of terms
| Terms used in the Annual Report | US equivalent or brief description |
| Accelerated capital allowances | Tax allowance in excess of depreciation arising from the purchase of fixed assets that |
| delay the charging and payment of tax. The US equivalent of tax depreciation. | |
| American Depositary Receipt (ADR) | Receipt evidencing title to an ADS. Each GlaxoSmithKline ADR represents two |
| Ordinary shares. | |
| American Depositary Shares (ADSs) | Ordinary |
| Basic earnings per share | Basic income per share. |
| Called-up share capital | Ordinary |
| CER growth | Growth at constant exchange rates. |
| Combined Code | Guidelines required by the Listing Rules of the Financial Services Authority to address the |
| principal aspects of Corporate Governance. | |
| The company | GlaxoSmithKline plc. |
| Currency swap | An exchange of two currencies, coupled with a subsequent re-exchange of those |
| currencies, at agreed exchange rates and dates. | |
| Defined benefit plan | Pension plan with specific employee benefits, often called ‘final salary scheme’. |
| Defined contribution plan | Pension plan with specific contributions and a level of pension dependent upon the |
| growth of the pension fund. | |
| Derivative financial instrument | A financial instrument that derives its value from the price or rate of some underlying item. |
| Diluted earnings per share | Diluted income per share. |
| Employee Share Ownership Plan Trusts | Trusts established by the Group to satisfy |
| Finance lease | Capital lease. |
| Freehold | Ownership with absolute rights in perpetuity. |
| Gearing ratio | Net debt as a percentage of |
| The Group | GlaxoSmithKline plc and its subsidiary undertakings. |
| Hedging | The reduction of risk, normally in relation to foreign currency or interest rate |
| movements, by making off-setting commitments. | |
| Intangible fixed assets | Assets without physical substance, such as computer software, brands, licences, patents, know-how and |
| marketing rights purchased from outside parties. | |
| Non-equity minority interest | Preference shares issued by a subsidiary to outside parties. |
| Preference shares | Shares issued at varying dividend rates that are treated as outside interests. |
| Profit | Income. |
| Profit | |
| Net income. | |
| Share capital | Ordinary |
| Shareholders’ funds | Shareholders’ equity. |
| Share option | Stock option. |
| Share premium account | Additional paid-up capital or paid-in surplus (not distributable). |
| Shares | Shares |
| Statement of | Statement of comprehensive income. |
| Subsidiary | An |
| Turnover | Revenue. |
| 174 | GSK Annual Report 2007 |
| MEMORANDUM AND ARTICLES OF ASSOCIATION | |
Memorandum and Articles of Association of GlaxoSmithKline
The following is a summary of the principal provisions of the company’s Memorandum of Association and Articles of Association. Shareholders should not rely on this summary, but should instead refer to the current Memorandum and Articles of Association which are filed with the Registrar of Companies in the UK or can be viewed on the company’s website. The Memorandum contains the fundamental provisions of the company’s constitution. The Articles contain the rules for the internal management and control of the company.
Memorandum of Association
The Memorandum of Association of GlaxoSmithKline provides that its principal objects are, among other things, to be the holding company of Glaxo Wellcome and SmithKline Beecham and to carry on business as a general commercial company and to carry on any trade or business or activity of any nature which may seem to the Directors to be capable of being conveniently or advantageously carried on.
Articles of Association
(a) Voting
All resolutions put to the vote at general meetings will be decided by poll. On a poll, every member who is present in person or by proxy shall have one vote for every Ordinary Share of which he is the holder. Unless the Directors otherwise decide, voting rights may not be exercised by a member who has not paid to the company all calls and other sums then payable by him in respect of shares in the company. Voting rights may not be exercised by a member who is subject to an order under Section 794 of the Companies Act 2006 because he has failed to provide GlaxoSmithKline with information concerning his interests in shares within the prescribed period, as required by Section 793 of the Companies Act 2006.
(b) Transfer of Ordinary Shares
Any member may transfer his Ordinary Shares which are in certificated form by an instrument of transfer in any usual form or in any other form which the Directors may approve. Such instrument must be properly stamped and lodged with GlaxoSmithKline accompanied by the relevant share certificate(s) and such other evidence as the Directors may reasonably require to show the right of the transferor to make the transfer. Every transfer of Ordinary Shares which are in uncertificated form must be carried out by means of a relevant system, as defined in the Regulations.
The Directors may, in their absolute discretion and without giving any reason, decline to register any transfer of any share which is not a fully paid share. The Articles contain no other restrictions on the transfer of fully paid shares provided (i) the transfer is in favour of not more than four transferees; (ii) the transfer is in respect of only one class of shares; and (iii) the holder of the shares is not subject to an order under Section 794 of the Companies Act 2006. Notice of refusal to register a transfer must be sent to the transferee within two months of the instrument of transfer being lodged.
The Directors may decline to register a transfer of Ordinary Shares by a person holding 0.25 per cent or more of the existing shares of a class if such person is subject to an order under Section 794 Companies Act 2006, after failure to provide GlaxoSmithKline with information concerning interests in those shares required to be provided under the Companies Act, unless the transfer is shown to the Directors to be an approved transfer (as defined in the Articles) or the transferor is not himself in default and he meets certain conditions set out in the Articles.
The registration of transfers may be suspended at such times and for such periods (not exceeding 30 days in any year) as the Directors may from time to time determine and which have been filed with the Registrar of Companies, either generally or in respect of any class of shares.
Provisions in the Articles will not apply to uncertified shares to the extent that they are inconsistent with:
| (i) | the holding of shares in uncertified form; |
| (ii) | the transfer of title to shares by means of a system such as CREST; and |
| (iii) | any provisions of the Regulations. |
(c) Dividends and distribution of assets on liquidation
The profits of GlaxoSmithKline which are available for distribution and permitted by law to be distributed and which GlaxoSmithKline may from time to time determine, upon the recommendation of the Directors, to distribute by way of dividend in respect of any accounting reference period shall be distributed by way of dividend among holders of Ordinary Shares.
If in their opinion GlaxoSmithKline’s profits justify such payments, the Directors may, as far as any applicable legislation allows, pay interim dividends on shares of any class, of such amounts and in respect of such periods as they think fit.
Except in so far as the rights attaching to, or the terms of issue of, any share otherwise provide, all dividends will be declared, apportioned and paid pro rata according to the amounts paid up on the shares during any portion of the period in respect of which the dividend is paid.
As GlaxoSmithKline has only one class of Ordinary Shares, the holders of such shares will under general law be entitled to participate in any surplus assets in a winding-up in proportion to their shareholdings. A liquidator may, with the sanction of an extraordinary resolution, divide among the members in kind all or part of the assets of GlaxoSmithKline (whether they shall consist of property of the same kind or not) as the liquidator deems fair.
(d) Variation of rights and changes in capital
Subject to the provisions of the Companies Act and to the terms of issue of the shares concerned, the rights attached to any class of shares may be varied with the written consent of the holders of three-quarters in nominal value of the issued shares of that class or with the sanction of an extraordinary resolution passed at a separate meeting of the holders of shares of that class.
At every such separate meeting, the provisions of the Articles relating to general meetings shall apply, except the necessary quorum shall be at least two persons holding or representing as proxy at least one-third in nominal value of the issued shares of the class (but provided that at any adjourned meeting any holder of shares of the class present in person or by proxy shall be a quorum).
| GSK Annual Report 2007 | 175 |
| MEMORANDUM AND ARTICLES OF ASSOCIATION | |
Contact detailsGlaxoSmithKline may by ordinary resolution increase its share capital, consolidate and divide all or any of its shares into shares of a larger nominal amount, cancel any shares not taken or agreed to be taken by any person and, subject to any applicable legislation, sub-divide its shares into shares of a smaller nominal amount.
INTERNET
Information for investorsGlaxoSmithKline may, subject to the provisions of the Companies Acts, by special resolution reduce its share capital or any capital redemption reserve, share premium account or other undistributable reserve. GlaxoSmithKline may also, subject to the requirements of the Companies Acts and about the company is available on GlaxoSmithKline’s corporate website at www.gsk.comrights of any of the holders of any class of shares, purchase its own shares.
HEAD OFFICE AND REGISTERED OFFICE(e) Unclaimed dividends
Any dividend unclaimed after a period of 12 years from the date when a resolution was passed for payment will be forfeited and revert to GlaxoSmithKline.
GlaxoSmithKline plc980 Great West RoadBrentfordMiddlesex TW8 9GSTel: +44 (0)20 8047 5000may stop sending dividend warrants by post in respect of any shares if at least two consecutive payments have remained uncashed or are returned undelivered or if one payment has remained uncashed or is returned undelivered and GlaxoSmithKline cannot establish a new address for the holder after making reasonable enquiries but in either case GlaxoSmithKline must resume sending warrants if the holder or any person entitled to the shares by transmission claims the arrears.
UNITED KINGDOM(f) Untraced shareholders
GlaxoSmithKline may sell any shares in GlaxoSmithKline after advertising its intention and waiting for three months if the shares have been in issue for at least ten years and during that period at least three dividends have become payable on them and have not been claimed and, so far as any Director is aware, GlaxoSmithKline has not received any indication during the relevant period of the whereabouts of the holder of the shares or any person entitled to them by transmission. Upon any such sale, GlaxoSmithKline will become indebted to the former holder of the shares or the person entitled to them by transmission for an amount equal to the net proceeds of sale.
Investor relations(g) Limitations on rights of non-resident or foreign shareholders980 Great West RoadBrentfordMiddlesex TW8 9GSTel: +44 (0)20 8047 5557 / 5558Fax: +44 (0)20 8047 7807There are no limitations imposed by the Articles of Association on the rights of non-resident or foreign shareholders except that there is no requirement for GlaxoSmithKline to serve notices on shareholders outside the United Kingdom and the United States.
Registrar(h) General meetings of shareholdersLloyds TSB RegistrarsThe CausewayWorthingWest Sussex BN99 6DAwww.shareview.co.ukGlaxoSmithKline is required to hold an annual general meeting each year. Extraordinary general meetings of shareholders may be called as necessary by the Board and must be called promptly upon receipt of a requisition from shareholders.
(i) Directors’ voting powersGeneral enquiries,Subject to the provisions of the Companies Acts, and provided the nature of a Director’s interest has been declared to the Directors, a Director is not disqualified by that office from contracting with GlaxoSmithKline in any manner, nor is any contract in which he is interested liable to be avoided, and any Director who is so interested is not liable to account to GlaxoSmithKline or the members for any benefit realised by the contract by reason of the Director holding that office or of the fiduciary relationship thereby established.
However, no Director may vote on any resolution relating specifically to his own remuneration. A Director may (or any firm of which he is a partner, employee or member may) act in a professional capacity for GlaxoSmithKline (other than as auditor) and be remunerated for so doing. A Director may also be or become director or other officer of, or be otherwise interested in, any company promoted by GlaxoSmithKline or in which GlaxoSmithKline may be interested and will not be liable to account to GlaxoSmithKline or the members for any benefit received by him.
(j) Directors’ remuneration
Each of the Directors will be paid a fee at such rate as may from time to time be determined by the Directors. Such fees may be satisfied in shares or in any other non-cash form. Any Director who is appointed to any executive office, acts as chairman or vice-chairman, serves on any committee of the directors or performs any other services which the Directors consider to extend beyond the ordinary services of a director shall be entitled to receive such remuneration (whether by way of salary, commission or otherwise) as the Directors or any committee authorised by the Directors may decide. Each Director may be paid reasonable travelling, hotel and other expenses he incurs in attending and returning from meetings of the Directors, of committees of the Directors or of GlaxoSmithKline or otherwise incurred in connection with the performance of his duties for GlaxoSmithKline.
(k) Pensions and gratuities for Directors
The Directors or any committee authorised by the Directors may provide benefits by the payment of gratuities, pensions or insurance or other allowances or benefits for any Director or former Director or their relations, connected persons or dependants.
(l) Borrowing powers
So far as the legislation allows, the Directors may exercise all GlaxoSmithKline’s powers to borrow money; to mortgage or charge all or any of GlaxoSmithKline’s undertaking, property (present and future), and uncalled capital; to issue debentures and other securities; and to give security either outright or as collateral security for any debt, liability or obligation or GlaxoSmithKline or of any third party.
(m) Retirement and removal of Directors
At every annual general meeting of GlaxoSmithKline, firstly, one-third of the Directors will retire by rotation and be eligible for re-election (or, if one-third is not a whole number, the number of directors to retire is the number which is nearest to one-third). If there are less than three directors, they will all retire. The Directors to retire will be those who were in office at the time of the two previous annual general meetings and who did not retire by rotation at either of them, and, secondly, if the number of directors retiring remains less than the minimum required to retire, those who have been longest in office or, in the case of those who were appointed or re-appointed on the same day, will be (unless they otherwise agree) determined by lot.
No Director is required to retire by reason of his age, nor do any special formalities apply to the appointment or re-election of any Director who is over any age limit.
| 176 | GSK Annual Report 2007 |
| INVESTOR INFORMATION | |
| Cross reference to Form 20-F | |
| Cross reference to Form 20-F | |
This table has been provided as a cross reference from the information included in this Annual Report orderlineto the requirements of Form 20-F.
| Item | Page | ||
| 1 | Identity of directors, senior management and advisors | n/a | |
| 2 | Offer statistics and expected timetable | n/a | |
| 3 | Key information | ||
| A | Selected financial data | 166-168 | |
| D | Risk factors | 50-53 | |
| 4 | Information on the company | ||
| A | History and development of the company | 2 | |
| Business overview | |||
| Products | 32, 33, 35 | ||
| Competition | 34, 35 | ||
| Regulation | 27, 28 | ||
| Marketing and distribution | 13 | ||
| Manufacture and supply | 26 | ||
| Research and development | 14-21 | ||
| Intellectual property | 28, 29 | ||
| Environment, health and safety | 29,30 | ||
| Access to medicines | 23 | ||
| Corporate responsibility and community investment | 24, 25 | ||
| C | Organisational structure | 149-151 | |
| D | Property, plant and equipment | 44 | |
| Note 6 – Segment information | 100-103 | ||
| Note 17 – Property, plant and equipment | 111, 112 | ||
| 4A | Unresolved staff comments | n/a | |
| 5 | Operating and financial review and prospects | ||
| A | Operating results | ||
| 2007 and 2006 | 36-53 | ||
| 2006 and 2005 | 54-58 | ||
| B | Liquidity and capital resources | 44-49 | |
| C | Research and development, patents and licenses, etc. | 12, 14-21 | |
| D | Trend information | 12 | |
| E | Off-balance sheet arrangements | n/a | |
| F | Tabular disclosure of contractual obligations | 46 | |
| 6 | Directors, senior management and employees | ||
| A | Directors and senior management | 60-61 | |
| B | Compensation | ||
| Remuneration Report | 71-86 | ||
| C | Board practices | ||
| Corporate governance | 62-70 | ||
| D | Employees | ||
| Being the best place for the best people to do | |||
| their best work | 22 | ||
| Note 10 – Employee costs | 106 | ||
| Note 28 – Pensions and post-employment benefits | 117-123 | ||
| Financial record | 168 | ||
| E | Share ownership | ||
| Being the best place for the best people to do | |||
| their best work | 22 | ||
| Note 42 – Employee share schemes | 144-148 | ||
| Share options | 75, 81-83 | ||
| Incentive plans | 74, 75, 83-85 | ||
| Directors’ interests | 81, 86 | ||
| 7 | Major shareholders and related party transactions | ||
| A | Major shareholders | 64,170 | |
| B | Related party transactions | ||
| Note 35 – Related party transactions | 130 | ||
| Item | Page | ||
| 8 | Financial information | ||
| A | Consolidated statements and other financial information | ||
| Financial statements | See item 18 | ||
| Note 44 – Legal proceedings | 152-158 | ||
| B | Significant changes | ||
| Note 40– Post balance sheet events | 136 | ||
| 9 | The offer and listing | ||
| A | Offer and listing details | ||
| Share price listing | 169, 171 | ||
| C | Markets | 171 | |
| 10 | Additional information | ||
| B | Memorandum and Articles of Association | 175, 176 | |
| D | Exchange controls | 170 | |
| E | Taxation | 173 | |
| H | Documents on display | 170 | |
| 11 | Quantitative and qualitative disclosures about market risk | ||
| Treasury policies | 48, 49 | ||
| Note 41 – Financial instruments and related disclosures | 137-144 | ||
| 12 | Description of securities other than equity securities | n/a | |
| 13 | Defaults, dividend arrearages and delinquencies | n/a | |
| 14 | Material modifications to the rights of security holders and use of proceeds | n/a | |
| 15 | Controls and procedures | 66, 67 | |
| 16 | [Reserved] | ||
| 16A | Audit Committee financial expert | 67 | |
| 16B | Code of ethics | 68 | |
| 16C | Principal accountant fees and services | ||
| Note 9 – Operating profit | 105 | ||
| 16D | Exemptions from the listing standard for auditcommittees | n/a | |
| 16E | Purchases of equity securities by the issuer and affiliated purchasers | ||
| Note 33 – Share capital and share premium account | 127 | ||
| 17 | Financial statements | n/a | |
| 18 | Financial statements | ||
| Independent auditors’ report | 89 | ||
| Consolidated income statement | 90 | ||
| Consolidated balance sheet | 91 | ||
| Consolidated cash flow statement | 92 | ||
| Consolidated statement of recognised income and expense | 93 | ||
| Notes to the financial statements | 94-158 | ||
| 19 | Exhibits | Footnote (i) | |
Footnote (i) – see the company's Form 20-F filing with the Securities andCorporate Nominee serviceTel: 0870 600 3991 inside the UKTel: +44 (0)121 415 7067 outside the UK Exchange Commission.
Shareholder Investment Plans
| GSK Annual Report 2007 | 177 |
Monthly Savings Plan enquiriesTel: 0870 606 0268 inside the UKTel: +44 (0)131 527 3746 outside the UK
ISA enquiriesTel: 0870 242 4244 inside the UKTel: +44 (0)1903 854 062 outside the UK
Glaxo Wellcome and SmithKline Beecham corporate PEPsThe Share Centre LimitedOxford HouseOxford RoadAylesburyBucks HP21 8SZTel: +44 (0)1296 414 144
Corporate Share dealing facilitySmith BarneyAttn: GSK ServicesCitigroup Centre, Level 20Canada Square, Canary WharfLondon E14 5LBTel: +44 (0)20 7508 1795Fax: +44 (0)20 7890 7281TheBalaesGroup@Citigroup.com
| www.gsk.com | |
| Head Office and Registered Office GlaxoSmithKline plc 980 Great West Road Brentford, Middlesex TW8 9GS United Kingdom Tel: +44 (0)20 8047 5000 | |
| Registered number: 3888792 |
UNITED STATES OF AMERICA
Investor relationsOne Franklin PlazaPO Box 7929Philadelphia PA 19101Tel: 1 888 825 5249 toll freeTel: +1 215 751 7003 outside the USAFax: +1 215 751 3233
ADR programme administratorThe Bank of New YorkShareholder RelationsPO Box 11258Church Street StationNew York NY 10286-1258www.adrbny.comTel: 1 877 353 1154 toll freeTel: +1 610 382 7836 outside the USA
Customer response centerTel: 1 888 825 5249 toll free
Corporate Share dealing facilitySmith BarneyAttn: GSK Services53 State Street39th FloorBoston, MA 02109Tel: 1 800 347 6179 toll freeTel: +1 617 589 3341 outside the USAFax: +1 617 589 3474TheTaylorGroup@SmithBarney.com
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Signature
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
| Printed in the UK by The Midas Press. The paper used in the production of this document is made from pulps harvested from sustainable forests, also using sawmill residues and forest thinnings. It is elemental chlorine-free. |  | |
Item 19 Exhibits
Exhibit Index